The fundamental problem with the quarterly instalment payments system is that it requires companies to make payments based on their estimated results for the current year – unlike individuals who can make their payments on account based on their previous year’s results. No satisfactory fiscal logic for imposing this burden on companies has ever been put forward by anybody I have spoken to, in either the government or the Revenue.
The simple fact is it raises more money this way.
When the new system was announced, the Chartered Institute of Taxation pointed out that estimating your taxable profits on the basis of, at best, month-five management accounts would be well-nigh impossible, and having to do four sets of calculations per year would add to company costs and impose a strain on resources.
Our cries went unheeded. It seems politicians needed the money and the Revenue was able to convince them that all this information would be readily available to companies and would not involve significant extra work.
It is difficult to avoid the phrase ‘told you so’.
The CBI has put together a well-reasoned summary of the issues companies are facing in practice – such as seasonal businesses whose results are dependent on one or two months’ trading. Only recently I read that a publisher will have to make a £14m provision in relation to a ‘seriously misjudged over-investment in Star Wars books for the pre-Christmas period’ – so their first instalment of tax was probably overstated by about £600,000, unless that particular piece of price-sensitive information was passed promptly to the tax manager .
And then of course there are the companies who make large capital gains towards the end of the year – helpfully, the Revenue has confirmed that an extra payment on account can be made at any time, although of course interest will have been running since the date of the first instalment – perhaps five months before the contract for the sale was signed.
The CBI’s main proposal is that the first three instalments should be based on the prior year’s results, and they calculate that the government’s cash flow could be maintained by bringing forward the instalment due dates by a mere six days.
The Revenue reaction to this suggestion has been, in my view, disappointing.
First, they are not convinced by the figures. Fair enough, we all know statistics is not a precise science. Of greater concern is their view that ministers will not consider fundamental change to the system until it has been in place for a longer period – and, in any case, the decision to use current year profits was taken following consultation at the time.
Let me make clear that the Revenue individuals we are dealing with are reasonable people and that the ongoing CTSA consultation process has been constructive and open. But we do not appear to be able to convince the Revenue and the Treasury that these issues are causing real problems for businesses, and that to wait another year or so means that resources will continue to be tied up in producing meaningless estimates purely to satisfy the demands of the QIPs system.
Sensing this battle may not be won quickly, CIoT is pushing on another front. The need to make estimates – which are bound to be wrong – is exacerbated by the interest rate regime. The current spread of 225 basis points between interest payable and receivable on tax under or overpaid verges on the penal for large companies, for whom a spread of between 50 and 75 points would be closer to commercial reality. We have suggested that the spread should be reduced to this level, except for the first, say £1m, which would continue to be charged at the current rates. This latter point is intended to deal with the fear that smaller companies could otherwise see the Revenue as a cheap banking facility.
We await the Revenue’s response.
Heather Self is the chairman of CIoT’s Technical Committee and a partner with Ernst & Young.
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