Inland Revenue 9
17 March 1998
______________________________________________________________
A MODERN SYSTEM FOR CORPORATION TAX PAYMENTS
After extensive consultation, the Chancellor confirmed in his
Budget today that a modern system for corporation tax
payments is to be introduced from 1999. Under these proposals:
- the main rate of corporation tax will be 30 per cent with
effect from 1 April 1999.
- advance corporation tax (ACT) will be abolished with
effect from 6 April 1999. This will considerably
simplify the company tax regime and all companies that
pay dividends will benefit.
- around 20,000 large companies will pay corporation tax by
instalments. This system, which will bring the UK into
line with other major industrialised countries, will be
phased-in, as planned, over a four year period.
- the remainder of the 700,000 companies that are subject
to corporation tax will not pay tax by instalments. The
Government has decided that excluding medium-sized
companies from the new system will make a significant
contribution to the fairness of the overall package,
keeping compliance costs down.
- interest on overpayments and underpayments of corporation
tax will be brought more closely into line with
commercial rates of interest and will be taxable and
deductible.
- a measure will be introduced to smooth the entry of
"newly large" companies into the system. Growing
companies will be protected from having unexpectedly to
pay their corporation tax by instalments if they become
large.
- groups of companies will be able to pay their corporation
tax on a group-wide basis, instead of company by
company.
The Chancellor has welcomed the participation in the
consultation process by individual companies and
representative bodies. He said:
"The abolition of ACT and the modernisation of the corporation
tax payments system are important elements in the drive for
simplicity and fairness. There has been a very positive
response to the consultation process and I am grateful for
the constructive input from business."
The 1 per cent cut in the main corporation tax rate to 30 per
cent from 1 April 1999 will help large companies make the
transition to instalment payments, and has been warmly
welcomed in discussions with them.
The scrapping of ACT has been widely welcomed by companies. It
will simplify the corporation tax regime, and enable
companies to take a range of business decisions without
regard to its effects. In particular, companies will no
longer face the threat of generating surplus ACT as a result
of cyclical movements and investment overseas.
DETAILS
Quarterly instalment payments
1. The change to quarterly instalment payments of
corporation tax by large companies will begin at the same
time as self assessment for companies is introduced, which
means it will affect accounting periods ending on or after 1
July 1999. From then, large companies will start to pay their
corporation tax in four equal quarterly instalments on the
basis of their anticipated liabilities for the accounting
period.
2. For a large company with a 12 month accounting period and
a 31 December year end, instalment payments will fall due on
14 July and 14 October in-year, and on 14 January and 14
April in the following year. One quarter of the large
company's corporation tax liability for the accounting period
will be payable on each of those dates.
3. Instalment payments will gradually increase over the four
year phasing-in period. This means that large companies will
pay: 60 per cent of their corporation tax by instalments in
year 1 of the transition, with the remaining 40 per cent
following nine months from the end of their accounting
periods (when all their mainstream corporation tax is paid
currently);
- 72 per cent by instalment payments for year 2, leaving 28
per cent to follow nine months after the end of their
accounting periods;
- 88 per cent of their corporation tax by instalments for
year 3, with 12 per cent following at the current due
and payable date; and
- 100 per cent by instalment payments in year 4, thus
completing the transition. 4. Large companies will
normally be able to have back any instalment payments
already made if they later conclude they ought not to
have been paid.
5. Large companies generally pay corporation tax at the main
rate, without marginal small companies relief. A company
without associated companies only counts as large if its tax
profits are at least 1.5 million pounds a year.
6. Some companies are grouped together with very large
numbers of associated companies, and therefore count as large
even though their own corporation tax liabilities may be
relatively small. They will not have to make instalment
payments if their corporation tax liabilities are below 5,000
pounds. Nor will companies with a lot of dividend income but
corporation tax liabilities below that limit.
7. Growing companies will not have to pay their corporation
tax by instalments in an accounting period in which they
become large if:
- their taxable profits for that accounting
period do not exceed 10 million pounds; and
- they were small or medium-sized for the previous year.
(Where there are associates, the threshold shown will be
reduced to the figure found by dividing that threshold by one
plus the number of associates at the end of the preceding
accounting period.)
8. The introduction of quarterly instalment payments of
corporation tax for large companies will bring the United
Kingdom into line with other major industrialised countries,
which already require companies to make instalment payments.
Abolition of ACT
9. Small and medium-sized companies that pay dividends will
obtain a cash-flow advantage of about 1 billion pounds from
the abolition of ACT.
10. Arrangements for the use after 1999 of surplus ACT built
up in the period to then will substantially preserve
companies' existing expectations as to its recovery. This
will be achieved through a system of shadow ACT.
11. Shadow ACT does not mean any companies will have to pay
something equivalent to ACT after its abolition in 1999. It
will be used solely to govern the recovery by companies of
past surplus ACT once ACT has been scrapped. Only companies
and groups containing companies with past surplus ACT as at
1999 will be affected, and only until that past surplus ACT
has been utilised.
12. Shadow ACT will work by:
- retaining the existing limit on the set off of ACT, so a
company will be able to use ACT to meet its corporation
tax liability up to a limit of 20 per cent of its
corporation tax profits, even beyond 5 April 1999;
- prescribing that the space for relieving ACT in this way
will first have to be filled by shadow ACT, computed on
the same basis and at the same rate as now, but without
allowing that shadow ACT to result in any reduction in
the corporation tax due;
- restricting the set off of past surplus ACT, which will
lead to a real reduction in the company's corporation
tax liability, to any space remaining after shadow ACT
has used some or all of it up; and
- carrying forward any shadow ACT in excess of the space
available for relieving ACT.
13. For example, suppose a company has past surplus ACT of
100,000 pounds. It has a 12 month accounting period ending
on 5 April 2000, during which it pays dividends of 40,000
pounds and for which it has taxable profits of 120,000
pounds. In that case:
- the limit on the set off of ACT is 24,000 pounds(that is,
20 per cent of 120,000 pounds);
- there is shadow ACT of 10,000 pounds (25 per cent of
40,000 pounds) on account of its dividend payments;
- the effect is to restrict the set off of past surplus ACT
to 14,000 pounds (24,000 pounds less 10,000 pounds); and
- its corporation tax liability is therefore reduced by
14,000 pounds, as is the figure for past surplus ACT
carried forward to the next accounting period.
14. Some companies responding to the consultation sought more
generous treatment of their past surplus ACT. But others
expressed the view that companies with past surplus ACT are
set to benefit most from the abolition of ACT, so they ought
not to be further advantaged as regards the past.
15. The abolition of ACT will cover payers and recipients of
manufactured dividends (that is, payments representative of
dividends on UK equities). They will not have to account for
real or notional ACT on payments that are made on or after 6
April 1999.
Interest
16. For accounting periods covered by self assessment for
companies:
- interest charged on underpaid corporation tax will be
deductible in computing tax profits and interest paid on
overpaid corporation tax will be taxable
- the spread between the interest rates applicable to
underpaid and overpaid corporation tax will be
significantly reduced for the period between the date
for the first instalment payment for a large company and
the date on which mainstream corporation tax is payable
currently; and
- interest on income tax repaid to a company will be paid
from the day after the end of the company's accounting
period, nine months sooner than the date from which
interest is paid at present.
17. It is envisaged that, in the period between the date for
the first instalment payment for a large company and the date
on which mainstream corporation tax is payable currently:
- the interest rate on corporation tax paid late will be
banks' base rate plus 2 percentage points; and
- for overpaid corporation tax, the interest rate will be
base rate minus 0.25 of a percentage point.
18. This means that, during that period, the interest rate
spread for large companies will fall from, effectively, 5
percentage points to 2.25 percentage points. There will be
no change to the before tax spread between the interest rates
applicable to underpaid and overpaid corporation tax for the
period after the date on which mainstream corporation tax is
paid currently.
19. Some large companies said that basing instalment payments
on estimated current year corporation tax liabilities would
be more acceptable to them if changes of this sort were made.
The changes are primarily intended to avoid penalising large
companies if they make honest mistakes over their instalment
payments. But they will apply to all companies.
Penalties
20. A Statement of Practice will be issued in due course to
provide large companies with greater certainty over when
penalties will and will not be chargeable if a large company
fails to make an instalment payment, or an instalment payment
of sufficient size, when it should have done so. It is
anticipated that there will be few such cases each year, with
most instances of late or inadequate instalment payments
resulting in no more than an interest charge.
Group payment arrangements
21. A facility for groups containing large companies to pay
their corporation tax on a group-wide basis, instead of
company by company, will be introduced as soon as possible.
Large companies responding to the consultation said this
would help them cope with the switch to instalment payments.
Quarterly accounting for gilt interest
22. The scheme under which companies have to account
quarterly for income tax on gilt interest they receive gross
will be scrapped from 1 April 1999.
UK investment funds
23. Authorised unit trusts and UK open-ended investment
companies are covered by the changes, because they are taxed
like companies. Their corporation tax rate will continue to
be linked to the lower rate of income tax.
Shareholders' dividends
24. There are no further changes in the way shareholders'
dividends are to be taxed from 1999, except as regards UK
equities held through an individual savings account or a
Personal Equity Plan. Please see the separate press release
Inland Revenue 2.
Consultation
25. A consultative document entitled "A modern system for
corporation tax payments" was issued on 25 November 1997.
110 responses were received from business and others by the
30 January deadline for comments. 26. In addition to the
points already covered, many respondents considered that some
or all instalment payments should be based on a large
company's corporation tax liability for the previous year,
rather than its estimated corporation tax bill for its
current accounting period. This was, however, nearly always
accompanied by the suggestion that there should be an option
to switch to the current year corporation tax liability in the
event of a downturn in profitability.
27. The Chancellor decided not to follow this approach
because:
- medium-sized companies that were flagged by
respondents as particularly likely to have difficulties in
estimating their corporation tax liabilities in-year will not
have to do so because they will not now have to make
instalment payments;
- a good number of large companies said that they already
produced detailed profit forecasts etc in-year and could
cope with making instalment payments based on their
estimated current year corporation tax liabilities;
- some large companies felt that a system of instalment
payments based on a mixture of previous year and current
year corporation tax liabilities would be particularly
unattractive; and
- allowing companies to make instalment payments based on
previous year or estimated current year corporation tax
liabilities would have required them to make two lots of
computations and added considerable complexity to the tax
regime.
28. The rules for instalment payments and shadow ACT will be
contained in secondary legislation. The necessary
regulations will be published in draft when, or shortly
after, the Finance Bill is published. This will facilitate
further consultation on the fine details before the
regulations are made (which will be after the Finance Bill
has received Royal Assent).
29. Further feedback on responses to the consultation will be
made available at the same time, along with a regulatory
assessment.
30. The draft regulations, further feedback and regulatory
assessment will be sent without request to the respondents to
the consultation. This material will also be available on
the Internet as follows:
Draft regulations
http://www.open.gov.uk/inrev/ctregs.htm
Feedback and
regulatory assessment
http://www.open.gov.uk/inrev/ctfeed.htm
31. Personal callers will be able to obtain free copies
between 9.00am and 5.00pm on weekdays from:
Inland Revenue Information Centre
South West Wing
Bush House
Strand
LONDON WC2B 4RD
NOTES FOR EDITORS
Corporation tax payments
1. At present, a UK company has to account for ACT at a rate
of 25 per cent when it pays dividends or makes other
qualifying distributions. Mainstream corporation tax is
currently payable nine months from the end of a company's
accounting period. ACT can be set against the company's
mainstream corporation tax bill within certain limits. ACT
which exceeds those limits is carried forward as surplus ACT.
2. The proposals announced by the Chancellor in his
pre-Budget report were set out in a 25 November 1997 press
release (Inland Revenue 1) entitled "A modern system for
corporation tax payments".
Categories of company
3. Very broad definitions of the different categories of
company are given below. In each case, where there are
associated companies, the limits shown are reduced to the
figures found by dividing those limits by one plus the number
of associates.
4. Large companies are those whose tax profits are at least
1.5 million pounds a year. They generally pay corporation
tax at the main rate. Although there are relatively few of
them, they account for about 85 per cent of the Exchequer
yield from corporation tax.
5. Medium-sized companies have tax profits of between 0.3
million pounds and 1.5 million pounds per annum. In most
cases they pay corporation tax at the main rate, but receive
marginal small companies relief which reduces the effective
rate of corporation tax.
6. Small companies are companies with tax profits of up to
0.3 million pounds a year. They usually pay corporation tax
at the small companies' rate.
7. Of the around 700,000 companies within the charge to
corporation tax, about 400,000 actually have corporation tax
to pay after taking into account reliefs etc.
Self assessment for companies
8. The start date for self assessment for companies was
announced on 25 November 1997 in a pre-Budget report press
release (Inland Revenue 2) called "Self assessment for
companies".
Manufactured dividends
9. Manufactured dividends are payments representative of
dividends and other distributions on UK equities. UK
resident companies must currently account for ACT on
manufactured dividends. Other UK payers must pay an amount
of tax equal to the ACT on the dividend. Recipients of
manufactured dividends paid from abroad may also have to
account for this notional ACT. Manufactured dividends
received are treated in other respects as if they are real
dividends.
Quarterly accounting for gilt interest
10. Quarterly accounting for gilt interest (QAGI) was
introduced when the last Government allowed gross payment of
gilt interest to some investors. It currently collects
income tax quarterly on gilt interest received by companies,
and so maintains the previous Exchequer cash flow. Payment by
larger companies of corporation tax by quarterly instalments
will mean that QAGI is no longer needed.
Shareholders' dividends
11. The way in which shareholders' dividends and other
qualifying distributions they receive are taxed from 1999
will be as set out in the 2 July 1997 press release (Inland
Revenue 2) entitled "Companies and their shareholders: tax
changes to promote investment by companies".
Simplification
12. The move to a modern system for corporation tax payments
will enable over 75 pages of existing legislation to be
removed from the statute book.
International comparisons
13. The company tax payment systems in other major
industrialised countries are in many cases stricter than the
one to be introduced in the UK. High level summaries for
Australia, Canada, France, Germany, Japan and the United
States were contained in the consultative document issued on
25 November 1997.
Revenue effects
14. The estimated effects of the changes on tax receipts are
set out below.
billion pounds
(-ve figures indicate an Exchequer cost)
1998 1999 2000 2001 2002 2003
-99 -00 -01 -02 -03 -04
30 per cent main rate - - -0.7 -1.0 -1.1 -1.1
from 1 April 1999
Introduction of
instalments and 0.1 1.6 2.0 3.1 2.2 -0.5
abolition of ACT
Abolition of quarterly
accounting for gilt - -0.6 - 0.1 0.1 -
interest from
1 April 1999
Net Exchequer effect 0.1 1.0 1.3 2.2 1.2 -1.6
15. Inevitably, the numbers shown are subject to wide margins
of error because of the many uncertainties inherent in
predicting the future baseline (that is, the Exchequer yield
without changes to the tax regime) and the impact of the
changes.
16. The effect of the 1 per cent cut to 30 per cent in the
main rate of corporation tax from 1 April 1999 is shown
before any adjustment to the timing of corporation tax
payments.
17. There are three components to the yield from introducing
instalment payments of corporation tax for large companies:
- the transitional impact of bringing forward the dates when
companies pay their (previously mainstream) corporation tax
bills and subsuming previous ACT (excluding any surplus ACT)
payments in quarterly instalment payments;
- after the transition, the permanent cash-flow benefit to the
Exchequer of getting corporation tax in sooner, which arises
because, taking one year with another, corporation tax
liabilities are expected to rise as a result of growth and
inflation; and
- the impact on receipts of possible changes in taxpayer
behaviour as a result of the changes in the company tax
payment system.
18. The changes mean that companies will no longer pay ACT
that becomes surplus. The Exchequer cost of this is expected
to average about 1 billion pounds a year after taking account
of the abolition of foreign income dividends in April 1999
and expected changes in company distribution policy. This
cost will mainly be in respect of surplus ACT which would have
arisen on the distribution by international companies of
overseas income on which foreign tax had already been paid.
19. The abolition of quarterly accounting for gilt interest
from 1 April 1999 will mainly result in a one-off Exchequer
cost, because receipts due in 1999- 2000 will generally be
deferred to the next financial year.
INLAND REVENUE PRESS OFFICE
Media enquiries to: 0171-438 6692/6706/7327
(Out of hours: 0860 359544)
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(Office hours only)