CCAB-I Position Paper

Introduction

CCAB-I wishes to highlight practical difficulties arising in the computation of preliminary tax for companies.

The 2002 Finance Act introduced for the first time a payment of preliminary Corporation Tax in respect of an accounting period which had not ended at the time of payment. This arrangement has operated on a phased basis involving three payment dates in all. The finalised system involving two Corporation Tax payment dates is to operate in respect of accounting periods ending on or after 1 January 2006. CCAB-I thus believes that it is now timely to review the operation of Preliminary Tax payments in the light of experiences during the phasing in basis.

Summary of Current Rules

It may be useful at this point to summarise the CT payment rules which will operate from 1 January 2006.

General Rules

Preliminary Tax becomes due 31 days before the end of the accounting period. If that due date is later than the 21st day of the month in which the due date falls, the preliminary tax is payable on the 21st day of that month.

Preliminary Tax must be no less than 90% of the final liability.

Interest charges arise by reference to the due date where:

• No preliminary tax has been paid, or
• The preliminary tax has been paid late, or
• The tax paid is less than 90% of the final liability

Special Rules

Where a company has a chargeable gain arising in the last month of the accounting period, a top-up payment of preliminary tax may be made within one month of the end of the accounting year to ensure that the 90% requirement is met.

A small company, defined as a company with a tax liability of less than €50,000 in the preceding accounting period, may pay 100% of that liability in satisfaction of the preliminary tax requirement for the current period.

Issues arising

A computation of preliminary tax due, based on an estimation of the final tax liability in advance of the year end poses particular difficulties for all taxpayers. This issue is satisfactorily addressed for income tax purposes because of the rule which permits a preliminary tax payment to be based on the liability for the preceding years of assessment. Revenue will know from their own records that the vast majority of individuals pay preliminary income tax by reference to the prior year rules. In fact, Revenue have encouraged this practice through undertaking that for returns filed prior to the end of August, a final assessment will issue in sufficient time to be used as a reference for the preliminary tax computation for the following year. Claims which are perceived to distort the “usual” liability – BES, Film Schemes – are excluded in the prior year rule computation.

As noted earlier, this option is not available for companies whose Corporation Tax for the previous period exceeds €50,000.

Preliminary Tax elements

Chargeable Gains

The preliminary tax which must be paid constitutes a percentage of the final Corporation Tax liability. This in itself distinguishes the position for companies from individuals, as any chargeable gains arising are included in the mainstream Corporation Tax figure. An individual's CGT is not included for preliminary tax purposes.

Aside from the difficulties arising from the concept of computing a preliminary tax payment on capital transactions, the inclusion of chargeable gains distorts the eligibility of companies for the €50,000 rule. A once off gain accruing to a small trading company eliminates the use of the rule for the following year.

Income Tax

Income tax liabilities due by the company must also be reflected in the preliminary Corporation Tax payment by virtue of TCA97 s239(11)(a). This further complicates the process of estimation, and a company with no mainstream Corporation Tax liability may well have obligations under this provision.

In cases where there is a requirement to make a royalty payment or interest payment towards the end of the accounting period, the relevant tax will not have accrued to the company at the time of payment of preliminary tax.

Issues which arise in preparing estimates

Timing

Given the timing of payments and the fact that the payment is due by the 21st of the month, in reality, the estimate has to be based on management accounts for the first ten months of the year.

Generally accepted accounting principles (GAAP)

The 2005 Finance Act introduced the production of accounts to GAAP standards for corporation tax purposes. The majority of small and medium size businesses would not necessarily follow GAAP in the preparation of their management accounts. It is on the management accounts that estimates before the end of an accounting period must be based – there is no other information to hand. The 2005 legislation in practice therefore adds additional complexity and uncertainty.

Exchange Gains and Losses

Such gains and losses will of course impact on a company's results. No company can know, or precisely anticipate, what the impact of exchange differences will be forty days in advance of the period end.

Impact on Compliant taxpayers

The Preliminary Tax regime impacts very seriously on compliant taxpayers who have made mistakes with their estimates. Any default on the amount due to be paid on the preliminary tax payment date results in the full amount of the liability falling due on that payment date. Accordingly interest is calculated:

• not on the shortfall between the preliminary tax due and the preliminary tax paid but between the final liability and the preliminary tax paid, and
• by reference to the preliminary tax payment date, rather than the due date of the balance of the final liability

This rule is so harsh that no compliant taxpayer would knowingly fall foul of it. It seems disproportionate that a company which files on time, and has settled its full liability, can be exposed to such interest charges because of an imbalance in the proportion of tax paid before and after the end of its accounting period.

On the other hand, the rules governing the repayment of overpaid tax with interest are such that, on commercial grounds, it is foolhardy for a company to overpay preliminary corporation tax.

Compliance costs

90% of corporate cases are “agent cases” – that is to say, companies employ the services of an outside accountant or agent to assist with their tax compliance duties. Gathering the information required to estimate preliminary tax creates little or no business benefit to the client. This work would be carried out in any event prior to the filing date with the benefit of more compete records. As a result, companies are forced to factor in the additional work as an irrecoverable cost of tax compliance.

There has been evidence in the past that the bulk of the overall Corporation Tax paid in any given year is accounted for by a relatively small number of companies. On this basis it should be a reasonably straightforward exercise to establish if a change in the basis of computation of preliminary tax would result in material distortion of the corporation tax payments. Furthermore, if on the basis of such an analysis some fluctuation seemed likely, it would still be possible to determine a tax threshold on which preliminary tax could be based, which might not have a negative effect on Exchequer figures. It may be possible, for instance, to revise the threshold from €50,000 to say €500,000.

If matters can be based on the preceding year, this may open up possibilities for Revenue to refine existing processes for the prompting of preliminary tax collections and the furnishing of overall Corporation Tax collection estimates in any given year.

Recommendation

CCAB-I strongly urges, as a real and immediate move both towards tax simplification and a reduction in compliance costs, that the use of the prior year's final liability be available as the basis for reckoning preliminary tax for all companies. Close comparisons can be drawn between income taxes collected under self assessment, and corporation tax. The prior year system works well for preliminary income tax, and will work as well for corporation tax.

At the very least, the threshold at which the previous year's liability may be used in satisfaction of preliminary tax should be increased significantly, and we consider a figure of €500,000 should be the minimum amount involved.