CTSA - taxflash no.2

Payment of corporation tax by instalments

Corporation tax self-assessment (CTSA) introduces new rules requiring "large companies" to pay their tax liabilities by instalments. The rules have important implications for cashflow as the effect is to bring forward the payment of corporation tax, although after 5 April 1999 companies will no longer have to pay advance corporation tax when they pay dividends. Additionally the instalment basis is being phased in over a four year transition period.

Commencement

The CTSA instalment rules apply to accounting periods (AP) ending after 30 June 1999.

Subject to the transition period, companies liable to pay by instalments will have to pay their tax in 4 quarterly tranches, the amount being calculated by reference to their expected profits for the year in question.

For example a company with a year end of 31/12/1999 will have to pay as follows:

1st instalment:	6 months and 14 days after the beginning of the AP	ie. 14/07/1999

2nd instalment:	9 months and 14 days after the beginning of the AP	ie. 14/10/1999

3rd instalment:	14 days after the end of the AP	ie. 14/01/2000

4th instalment:	3 months and 14 days after the end of the AP	ie. 14/04/2000

Large Companies - Definition

It is important to note that only companies which are defined as "large" under the CTSA regulations will have to pay their tax by instalments.

A large company is one whose profits in an accounting period are more than the "Upper relevant maximum amount", as defined for Small Companies Rate purposes, in force at the end of the accounting period. The upper relevant maximum limit is £1.5m for the financial year to 31 March 2000. Companies which are liable to corporation tax at the marginal rate or the Small Companies Rate cannot be "large" for the purposes of payment by instalments under CTSA.

The £1.5m threshold is divided by the number of companies under common control, including non-UK companies.

There are additional rules which complicate the position:

A company is not large if its total liability for an accounting period is under £5,000 (this limit is reduced pro rata for accounting periods of less than 12 months).
A company is not large if its profits are less than £10m (this limit is reduced by the number of associated companies at the end of the previous accounting period) and it was not a large company in its preceding accounting period.

e.g. Single Company: Upper relevant maximum limit of £1.5m.

Accounting Period	Profits Position
Year to 31/12/1999	£1.4m	Not a "large company"
Year to 31/12/2000	£1.7m	Not large because not large in previous year
Year to 21/12/2001	£2.0m	Large - liable to pay by instalments

Instalments and the transition period

Transitional rules for payments by instalment apply to the period from 1 July 1999 to 30 June 2002. During this period companies that are liable will pay only a proportion of their tax by instalment with the balance being due 9 months after the year end, as now. The proportions are as follows:

Accounting period ending between	Proportion of tax payable by instalments
1/7/1999 - 30/6/2000	60%
1/7/2000 - 30/6/2001	72%
1/7/2001 - 30/6/2002	88%
1/7/2002 - onwards	100%

In practical terms the instalment basis brings forward the payment of tax and thus has an adverse cashflow impact. With the phasing of instalments the position is complicated by the tax not paid by instalment being due 9 months after the year-end, as now. For example, single company:

	Year to 31/12/98 Taxable profits £1.6m	Year to 31/12/99 Taxable profits £1.8m	Year to 31/12/2000 Taxable profits £2.0m
Tax liability (£000's)	496	546	600
Dates tax payable
14/07/1999		82 (15%)
01/10/1999	496 (100%)
14/10/1999		82 (15%)
14/01/2000		82 (15%)
14/04/2000		82 (15%)
14/07/2000			108 (18%)
01/10/2000		218 (40%)
14/10/2000			108 (18%)
14/01/2001			108 (18%)
14/04/2001			108 (18%)
01/10/2001			168 (28%)
	and so on

Interest and Penalties

There are provisions for interest where instalments are either underpaid or overpaid, with an interest rate differential in the Revenue's favour. Penalties of up to twice the interest due can be levied where it is found that a company has "deliberately or recklessly" failed to pay part or all of an amount due by instalment. With instalments having to be paid on the basis of expected rather than audited profits these regulations could cause substantial problems.

Groups

For groups where there may be a number of companies liable to pay by instalment, arrangements can be made for all the payments to be dealt through one nominated company. Arrangements can be put in place for periods ending 31 December 1999 or later.

Every effort has been made to ensure that the facts in this document are correct at the time of going to press. No responsibility for loss occasioned to any person acting or refraining from acting as a result of any material in this publication can be accepted. Authorised to carry on investment business by the Institute of Chartered Accountants in England & Wales.

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