Clause 55 - Duty of company to give notice of coming within charge to corporation tax

Finance Bill (except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39) – in a Public Bill Committee at 3:15 pm on 13th May 2004.

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Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury 3:15 pm, 13th May 2004

I beg to move amendment No. 110, in

clause 55, page 61, line 1, leave out 'three' and insert 'six'.

As hon. Members will know, the clause is about new companies being required to notify the Revenue within three months of their first accounting period. In the past, if companies have not been sent a corporation tax return, they have been obliged to notify the Revenue within 12 months of the end of their accounting period. That could amount to 24 months after the start of the business.

In practice, the Revenue has traditionally found out from the registrar of companies when new companies have formed. Each new company has been sent a form to complete, requesting basic tax information and other details such as when the company started and who the directors are. It was not a statutory return and could be ignored without penalty, but if it was ignored the Revenue's practice was to assume, provisionally, that the first accounting period would run for 12 months from the date of incorporation, and a return would be required accordingly.

By way of a description of the changes under the clause, the Revenue's Budget notice document ''Protecting Revenues'' stated that

''the requirement for newly incorporated businesses to disclose basic tax information will be strengthened''.

What is actually introduced is an obligation for the companies to tell the Revenue in writing that an accounting period has commenced because they have come within corporation tax for the first time, and notification has to be given within three months of commencement. The obligation is underpinned by the threat of a penalty of up to £300 for initial failure and £60 per day for continued failure. As with other comparable penalties, they can be avoided with a reasonable excuse, but ignorance is not one of them.

The provision is reasonably straightforward, although unincorporated associations and clubs that are subject to corporation tax have been excluded. Will the Economic Secretary confirm that the arrangements also apply to dormant companies? Are they related to incorporation or to coming within the charge? In either event, the provision needs significant publicity as many people buy companies via the internet and may be unaware of it. There should be some form of reminder issued automatically.

The Chartered Institute of Taxation, which we are inclined to support, believes that the notice period of three months within which an entity must give notice of falling within the charge to corporation tax is rather short, and we see no reason why the requirement to notify should not be replaced with a requirement to file or with a longer period. We would expect tax legislation to impose less stringent requirements on companies moving into the corporation tax system on the grounds that they are naturally less familiar with the rules and with their obligations.

It is tempting to think that the Treasury has seen another nice little earning opportunity and that, as with self-employed notification where the £100 penalty has been quite a successful source of money because of people not meeting the timing requirement, the same thinking is that the provision may be a not unworthwhile source of income.

Amendment No. 110 would extends the time for giving notice to six months.

Photo of Michael Jack Michael Jack Conservative, Fylde 3:30 pm, 13th May 2004

In following the argument made by my hon. Friend the Member for Arundel and South Downs, will the Economic Secretary clarify one or two points when he replies? There is at least a verbal inconsistency between the explanatory notes on the clause and the way in which it is drafted.

The amendment would provide a longer period for a company to respond to its obligations. The clause says that the company

''must give notice to the Board of the beginning of its first accountancy period''.

It seems clear that when a company comes into existence it must identify itself to the Revenue. The explanatory notes state:

''It places a statutory obligation on companies to notify the Board within 3 months of when they first come within the scope of'' corporation tax.

If one had an enterprise and the business plan said that for the first 12 months the company was going to make a loss, it would not be unreasonable for the owners to say, ''Well, we won't incur a corporation tax liability, so there's no need for us to notify anybody of our existence.'' It becomes relevant only if the loss accumulates and carries over into a second accounting or tax period and the business moves into profit. It then becomes liable for payment of corporation tax on the normal basis, but equally to utilise its losses. The company then engages with the mechanism of corporation tax.

To avoid doubt, if someone believes that their business will not have a real world liability, does the clause means that they will have to pay corporation tax to the Revenue, because that is what the explanatory notes suggest?

Photo of John Healey John Healey The Economic Secretary to the Treasury

I shall ask the hon. Gentleman to consider withdrawing the amendment, which relates to a narrow point, and ask the Committee to reject it if he chooses not to do so.

The amendment would frustrate the object of the new requirement in the clause for early notification and the provision of information to the Inland Revenue, so that the Revenue can ensure compliance with a wide range of company obligations and offer timely help and support.

The hon. Member for Arundel and South Downs and the right hon. Member for Fylde (Mr. Jack) made a couple of broader points and asked a couple of broader questions. I should say that the clause is intended to ensure that companies that come within the charge to corporation tax comply with their obligations from the outset. A company will usually come within the charge to corporation tax when it starts a business.

Details of newly active companies are important for tax compliance purposes at the point at which they come within the charge to corporation tax. Equally importantly, the new requirement will enable the Revenue to make earlier contact with companies to offer help and support. I trust that all members of the Committee accept that helping businesses to get it right is much better than having to put things right later if they go wrong.

The clause therefore places a statutory obligation on companies to notify the Revenue within three months of their first coming within the charge to corporation tax, and within three months of coming back into the charge to corporation tax following a period of dormancy. I will answer the question asked by the hon. Member for Arundel and South Downs on dormancy in a moment.

The obligation requires a company to provide details of the company, its activities and directors. Precise details of the prescribed information are contained in the draft regulations that I circulated to the Committee earlier this week, which were also published yesterday on the Inland Revenue's website.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

To some extent, I like things to be cut and dried, but it strikes me that reasonably naive new entrepreneurs will not have a clue about this unless they are all well organised by their accountants. Three months also go very quickly. If I were in that situation, I would certainly find it extremely annoying—as annoying, say, as receiving a parking ticket when one is a minute or so late—to find that I had been given a fine that was building up. It is good Germanic order to have this period of three months, but the number of companies that may not comply out of ignorance may be rather more than one might expect.

Photo of John Healey John Healey The Economic Secretary to the Treasury

All newly incorporated UK companies will receive information about the requirement soon after they set up. They will also be able to obtain advice and support from the Revenue. We will publicise the provision very widely, and will certainly consider any need for additional publicity as the provisions bed in. To summarise the more general points, it is important that the Revenue can ensure compliance with tax obligations by all businesses, including companies, right from the start of their business lives.

These arrangements would apply only to companies with a corporation tax accounting period, not to dormant companies. They therefore apply only to new companies or to companies that have restarted in business after a period of dormancy.

The amendment would create an asymmetry in the obligation to notify between the self-employed and incorporated businesses. It would be three months for the former and six months for the latter. The need for early notification is the same for all kinds of business, irrespective of their legal form. It would be an odd result if the same business were to be subject to a three-month requirement while self-employed, but to a six-month requirement if it incorporated.

The three-month time limit is not unreasonable. The first accounting period begins when a company comes within the charge to corporation tax, by which time all the information required will almost always be available. In the rare case when a company may have some doubt about the time of the start of its first accounting period, measures of protection are built into the clause, in particular the reasonable excuse provisions. Those prevent the levy of a penalty where a company has made a genuine mistake and rectified it at the earliest possible opportunity. It is unlikely that a company faced with such uncertainty would be any better off after six months rather than three.

On that basis, I hope that the hon. Member for Arundel and South Downs will consider withdrawing the amendment, and if not I shall have to ask my hon. Friends to oppose him.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

As the Bill more than removes the major fiscal incentive given to small business incorporation, I see that there is an argument basically that the notice period should be the same for the self-employed as for businesses. I trust that the Revenue's guidelines will be to act in a reasonably mature and helpful manner and not to start whopping people with fines in an aggressive fashion. I also make the point that there could be a nice little earner in the measure, notwithstanding that. It is debatable. I can see the symmetry with the self-employed and I do not think that we want to raise the issue as a major point. I trust that the Revenue's guidelines will be to act in a reasonable fashion, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I beg to move amendment No. 111, in

clause 55, page 61, line 21, at end insert—

'(6A) In paragraph 2 of Schedule 18 to the Finance Act 1998 (duty to give notice of chargeability) insert—

''(5) This paragraph shall not apply where notice has already been given under section 55(1) of the Finance Act 2004 (duty of company to give notice of coming within charge to corporation tax) for the accounting period.''.'.

This follows from what I have talked about in relation to amendment No. 110. It is more practical and removes the existing obligation to notify chargeability to corporation tax where notice has already been given for the same accounting period.

Photo of John Healey John Healey The Economic Secretary to the Treasury

What is at issue is the interaction between two separate and distinct obligations: first, the obligation under schedule 18 to the Finance Act 1998 to notify chargeability to tax as an annual obligation, which applies only if the company has not received a notice requiring a company tax return, and secondly, the obligation introduced by the new clause, which is not annual and is triggered only when a company first comes within the charge to corporation tax or comes back into charge after dormancy.

There are important differences between the separate requirements to notify. One applies only in the first year of starting a business; the other is an annual and recurring obligation. One does not depend on any liability to corporation tax; the other depends on such a liability. In one case, it is important to get things right from the start for both companies and the Inland Revenue; in the other, it only applies where there has been a failure by a company.

The amendment would switch off the failure to notify chargeability obligation for the first accounting period of a company starting in business where the clause 55 obligation has already been satisfied. The amendment adds little of value and our concern is that it could prove to be counter-productive. Switching off paragraph 2 would, in a small but possibly significant number of cases, reward non-compliance. It would pay companies deliberately to drop off the radar, as it were, when notifying under clause 55; only when the Revenue catches up with the company would it have to pay tax and interest, but it would not receive a penalty for an attempt deliberately to evade.

In practice, a compliant company that gave notice within three months of first coming within the charge to corporation tax, or within three months of coming back into charge following a period of dormancy, would also have notified its chargeability to tax for that accounting period, as required under schedule 18. There is no need to provide for that explicitly in the clause. I therefore ask the hon. Gentleman to consider withdrawing the amendment.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury 3:45 pm, 13th May 2004

I do not want to be a pedant—perhaps the amendment could be improved—but the intent is rather the other way round. During the first year, companies giving three months' notice under the clause should not have to repeat the obligation of notice under schedule 18. As the Minister pointed out, it would be relevant only during that first year; but they would have to continue complying with the requirements of schedule 18. It seems that bureaucracy should be aimed at removing double reporting of the same information.

I repeat that we may have got it drafted the wrong way round, but it seems that the new arrangements for that first year should give the Revenue all it needs, albeit for different purposes, and schedule 18 should come afterwards. Would the Minister comment on that?

Photo of John Healey John Healey The Economic Secretary to the Treasury

I believe that I have dealt with the points made by the hon. Gentleman. The two obligations have slightly different purposes. We believe that the existing obligation under schedule 18 is fine for the purpose for which it was designed, but the obligation under clause 55 serves a different purpose, which would be undermined by the amendment. I shall therefore encourage my hon. Friends to vote against it should the hon. Gentleman choose to press it.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I hope that the Revenue can sort it out. It is clearly silly to have to give the same information in year one under two different parts of the law; it is the same information. That is what the amendment is about. It is not a huge point and it is not worth voting on, but it is the other way round from what the Minister argued. I have made my point. Perhaps the Revenue can get its act in order, so that companies will receive one request that meets both schedule 18 and the new requirements. Otherwise, it will be a classic example of the bureaucratic incompetence that is sweeping our society that people will have to send the same information twice under separate provisions. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I seek your guidance, Mr. McWilliam. Clause 55 has provision for prescribed regulations. A draft of those regulations has been circulated. Is it in order for me to make brief comments on those draft regulations?

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Following the point made by the hon. Member for Arundel and South Downs, paragraph 2(3) of the draft statutory instrument seems to require a company to provide information that would already have been supplied to Companies House on the incorporation of the company. It seems to be a duplication. Can the Minister explain whether it is for data protection reasons that Companies House is not allowed to pass even such basic information across to the Inland Revenue?

Photo of John Healey John Healey The Economic Secretary to the Treasury

If my hon. Friend will allow me, I shall look into the point and write to him. In general, the purpose of circulating regulations in draft is to give Committee members—and others, as the consultation is much wider—the chance to pick up and query any points in just that fashion.

Question put and agreed to.

Clause 55 ordered to stand part of the Bill.

Clause 56Relief for community amateur sports clubs