'.—(1) After subsection (2)(d) of section 36 of the Finance Act 1998, insert—
''(da) may make provision for members of the group of companies to elect to base this corporation tax payment on the previous year's taxable profits;''.
(2) In section 59E(1) of the Taxes Management Act 1970, at end insert—
''such that for a company:
(a) payment of corporation tax shall be paid in four annual instalments (for the purposes of this subsection the 'Instalment Date');
(b) the corporation tax payable on each of the first, second and third Instalment Dates shall be equal to one quarter of the total corporation tax paid by the company in the immediately preceding year of assessment;
(c) the corporation tax payable on the fourth Instalment Date shall be equal to the aggregate of—
(i) one quarter of the total corporation tax paid by the company in the immediately preceding year of assessment; and
(ii) the difference between the total corporation tax liability of the company concerned for the year of assessment in which the fourth Instalment Date falls and the corporation tax liability of the company in the immediately preceding year of assessment.''.'.—[Mr. Flight.]
Brought up, and read the First time.
I beg to move, That the clause be read a Second time.
We touched on the contents of this new clause earlier. It seeks to give companies the choice of paying their tax instalments based on the previous year's taxable profits, which would greatly reduce the administration and the costs to companies that currently must estimate annual taxable profits five and a half months before the end of the accounting period. Failure to perform a reasonable estimate leads to interest penalties being levied. That means that companies have to calculate their tax liabilities at least three times: once for each of the payments in months seven and 10 of the accounting period and once for all payments after the end of the accounting period. It is an unnecessary burden. The ideal solution would be to make the arrangements similar to those for individuals' payments on accounts, based on the previous year unless reasonable evidence exists to show that it is too high.
The regulations are in a statutory instrument, so in a sense this is a probing amendment to raise the point. When we touched on it before, the Minister replied that the rules did not need to be changed because the
rate of interest on unpaid tax had been reduced. Although that is true, it does nothing about the cost burden and administrative burden to companies in having to make all those calculations. They need to show that they have calculated their payments on account to the best of their knowledge and belief where lack of evidence leads to penalties. Why should it not be accepted that companies cannot make an accurate payment on account? There are not many other examples of payment on account where the payer has both to estimate what the final liability might be and pay interest if the estimate is incorrect.
I shall ask the Committee to reject the new clause, which causes further complexity and confusion in the current arrangements for instalments of companies tax and could lead to a loss of cash flow to the Inland Revenue. The clause provides an election for a previous year or current year basis of assessment, but applies only to companies that are within group payment arrangements. Outside group payment arrangements, the method of calculating the quarterly instalments is flawed because it locks companies into paying instalments of a fixed amount by reference to the previous year, even where it may be clear that the current year liability will be much lower than that for the previous year. It would be a distinct disadvantage to the company. Although that is not the intention of the new clause, that is what would happen.
Complex provisions would be required to deal with accounting periods of differing lengths and the new clause does not provide special rules that would be required to establish payments due on the commencement of activity. The new clause would also increase complexity in the interest regime. It is unlikely that the previous year's liability would have been established with any certainty when payments for the current year became due, and it is not uncommon for a company's liability for one year to be settled before that of the previous year.
The other effect of the new clause is to provide some group companies within the instalments regime with a right to elect for either a previous year or a current year basis of quarterly instalment payments. It is not clear why the new clause allows that choice only to companies within group payment arrangements. The effect of offering such a choice would be that companies would opt to pay the lower of the previous and current year, which would have a significant cash-flow effect on Exchequer receipts. More fundamentally, the Government believe that it is right for large companies to pay tax on a current year basis as profits are made. I assume that the new clause was drafted because of companies' concerns about estimating their current year profits accurately. We recognise those concerns, and have already taken steps to help companies, to which the hon. Gentleman referred. Two years ago, we reduced the interest rate on underpaid instalments by 1 per cent. More recently, the Inland Revenue has worked with industry, representative bodies and advisers to produce guidance on the practical application of the instalment system. The guidance clarifies the underlying principles of the regime through detailed
examples, and aims to spell out more clearly what can and cannot be reasonably expected of companies. To date, the feedback from those consultations has been positive.
The Inland Revenue intends to publish the guidance at the end of July in time for the July payment. The hon. Member for Arundel and South Downs (Mr. Flight) is welcome, as always, to receive the draft guidance and to consider and comment on it before its publication at the end of June, if he so wishes. However, I impress on him that his new clause would make the instalment payments far more complex and difficult for companies. After thorough consultation with those who expressed an interest in this matter, we believe that the guidance has now dealt with the small problem that he seeks to address. I therefore hope that, on this occasion, he will agree to withdraw his new clause. If he is not satisfied, I am sure that he will refer to the matter again when we consider the Finance Bill next year.
I look forward to receiving the guidance notes, which perhaps represents half a cake. I said that this was a probing amendment. The Paymaster General overstated its complexity as, in essence, it proposes that companies should have the option of incurring the effort of calculating current year, or to use prior year. For medium-sized companies, it is a relatively greater effort to deal with current year. We are pleased that the Treasury realises that current-year calculations are an imposition. Indeed, the imposition of advance payments was one of the many stealth taxes of the past four years. However, half a cake is better than no cake, so I beg to ask leave to withdraw the motion.
Motion and clause, by leave, withdrawn.