For large companies with 31 December year ends the moment of truth under the new Corporation Tax Self Assessment régime is fast approaching, as they must guess their likely profits for the current year and pay the first quarterly instalment by 14 July 1999. Companies with earlier year ends may already have paid instalments, as the new régime applies to any accounting period ending on or after 1 July 1999.
‘Large companies’ for this purpose are, broadly, those with profits in excess of £1.5 million. Where there are associated companies this limit is split equally between them.
Where instalment payments which are made prove to have been based on an underestimate or overestimate of the company’s profits interest will be payable either to or (at a lower rate) by the Inland Revenue.
In addition to an interest charge where inadequate payments are made, the relevant regulations provide for a penalty of up to twice the amount of the interest where either:
- the underpayment is made deliberately or recklessly; or
- a claim for repayment of instalments on the grounds of a reduced estimate of profits is made fraudulently or negligently.
The difficulties inherent in basing tax payments on estimated results are obvious. Changes in the economic cycle, in interest rates or consumer confidence may all affect the position, even before taking into account the particular circumstances of individual companies. It is therefore almost inevitable that companies will frequently find themselves in the position of having made smaller payments than eventually prove to have been due.
Companies have therefore been anxious, ever since the draft regulations were published in April 1998, for some clarification from the Revenue on when it will seek to apply the penalty provisions. The draft regulations provided for a penalty where the company ‘deliberately or negligently’ failed to pay the full amount due. Following consultations, this was amended to ‘deliberately or recklessly’, which implied some softening of attitude.
Now the Revenue has issued formal guidance on how it will apply both the information powers and the penalty provisions which were included in the final regulations.
The regulations give the Revenue an unfettered power to require the provision of information or the production of records relating to the computation of instalment payments. The new guidance lays down criteria for using this power which are identical to the criteria given by the regulations themselves for the charging of a penalty. It therefore becomes doubly important to ascertain when these conditions will be considered to be met. The guidance states that a penalty will be sought ‘only in the most serious cases involving flagrant abuse of the regulations’, and that cases will be submitted to Head Office for approval before they are pursued.
While this approach is clearly more welcome than an indication that the Inland Revenue intends to take an aggressive line, it is far from informative. It is not clear whether the reference to ‘flagrant abuse’ is intended to be merely interpretative or whether it involves any element of concession. Neither does the guidance give any indication whatever of the sort of cases which might be considered to be within, or outside, the terms of the statement.
Unless further detailed guidance is forthcoming, the uncertainty will remain - at least until a pattern begins to emerge from the way the Inland Revenue seeks to apply the rules in practice.
For further information, speak to your usual KPMG tax contact.
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