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CTSA Instalment payments

Category Technical Articles
AuthorTechnical Department
Extract from an article by Adrian Rudd (of PricewaterhouseCoopers, Tax Adviser's representative on Technical Committee) regarding CTSA Instalment payments (published in the July 2000 issue of Tax Adviser.) The Government announced at the time of the Budget that the interest rate payable by large companies under the quarterly instalment payment regime was to be reduced by 1 per cent. Members of the Institute may be interested to know that this announcement followed representations made by the Institute and by the CBI.

In November 1999 the Chairman of the Technical Committee, Heather Self, wrote to the Inland Revenue making the following points:

‘The issue which is causing greatest concern is the requirement to base instalment payments on forecast profits for the current year, coupled with an interest regime which is perceived as penal in some circumstances…

‘No matter how much effort is applied by a company, in virtually all cases it is simply impossible to predict the year’s results with any degree of accuracy, especially for the first two instalments. The time spent in calculating the instalment payments represents an additional administrative burden for companies and is an unproductive use of time and resources.

‘In itself, this would not necessarily be a major problem provided any interest exposure was at a commercial rate and the risk of penalties could be avoided. The Revenue have already provided significant reassurance on the question of penalties, and the CIOT have made a further suggestion of a “safe harbour” which could be applied for penalty purposes only. This leaves the question of the interest rate.

‘I have discussed this with tax directors from a range of very large companies. They have expressed the view that the spread between interest on over- and underpayments is too large at 225 basis points, and does not represent mere commercial restitution.

‘One possibility, as set out in the CBI letter, would be to base the first three instalments on the previous year’s profits, with a small adjustment to the due date in order to counter the cash flow cost to the Treasury. However, there would also need to be a facility for companies to reduce payments if actual profits fell (as is the case with the ITSA system).

‘Another option, and perhaps one which would require less fundamental change to the regime, would be to narrow the spread to no more than 50 basis points. It would be simplest to do this across the board, but if the Revenue feel that this might encourage smaller companies to use the Treasury for cheap banking facilities, a compromise would be to apply the lower rate to liabilities in excess of say £1million. This would avoid the need to apply different rates to different types of companies: it would merely be necessary to calculate interest at the appropriate rate on the final liability.’

Although the changes which the Government actually introduced do not go as far the Institute had suggested, they will be very welcome to large companies.

Technical Department
020 7235 9381


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