Contributor: Angela Fleming, Partner & Head of Financial Services Tax, BDO
The 2002 Finance Act introduced a payment of preliminary Corporation Tax with a two-tier small/large preliminary tax system introduced in October 2008 but the current rules have created difficulties in estimating current year tax liabilities before year end, and the risk of penalties. BDO’s Angela Fleming analyses the PT challenges that corporates currently face and suggests a number of changes to make the system more user-friendly and equitable for corporates.
The timing of preliminary tax due dates under existing rules can pose challenges for corporates, particularly large companies. The first instalment of preliminary tax for a large company is due 6 months into the accounting period. The amount due is the lower of 50% of the prior year liability, or 45% of the current year liability. In our experience it is rare that companies will opt to pay based on 45% of the current year liability, unless there has been a significant change in the business’ profitability. However, even relying on the 50% rule poses challenges as, in many cases the calculation of the corporation tax liability for the prior year may not yet be finally determined, as this date falls three months earlier than the filing deadline for the return. Contrast this to the rules for Income Tax where preliminary tax for the following year is payable on the same date at the filing deadline for the current year return.
Another significant challenge for large companies is meeting their obligations with respect to the second instalment of preliminary tax. This payment is due a month before the end of the accounting period. For some companies, with little fluctuation in taxable profits year-on-year, estimating their tax liability for the year at this stage may not pose too much difficulty. However, for many companies it can be a significant challenge. This is especially true for financial services companies. The current rules provide for “top-up” payments to be made within a month of the year end, however, these rules only apply in certain circumstances – where the shortfall is linked to capital disposals, interest limitation adjustments and/or fair value movements, rather than fluctuations in normal trading profits.
We would like to see the following changes made to the due dates for preliminary tax payments as follows:
- For small companies, bring forward the due date for preliminary tax to align it with the filing deadline for the prior year return (similar to Income Tax);
- For large companies, align the due date for the first instalment of preliminary tax with the filing deadline for the prior year return, and move the due date for the second instalment of preliminary tax to one month post-year end.
The above change would also help to mitigate situations where growing companies move from ‘small’ to ‘large’ company status for the first time but inadvertently miss their PT1 obligation as the prior year liability is only determined after the due date for the payment.
We recognise that there is a cash-flow impact of the above changes for the Irish exchequer, hence the recommendation to bring forward the due date for small companies (to partially offset the impact of changes for large companies). However, there should be little overall cost to the exchequer of the above proposed changes.
We would also like to see changes to how statutory interest is calculated on underpayments of preliminary tax. In our experience, such underpayments generally arise despite best efforts by a corporate taxpayer to meet their obligations, rather than a deliberate neglect of their obligations. However, the existing rules are disproportionate in such cases and can give rise to significant interest bills even where obligations are missed by only small amounts. This is due to the effective loss of the 50% and 100% rules where payment obligations are missed. In our view, statutory interest should only apply on the actual shortfalls arising, based on the lower of 50%/45% or 100%/90% tests, as applicable. This would ensure that the statutory interest regime does meet its objective of compensating the exchequer losses, while being proportionate to the loss arising.
Finally, due to the significant challenge of estimating tax liabilities in advance of a year end, it is not uncommon for companies to overpay preliminary tax. In such circumstances, where it subsequently becomes apparent that there has been an overpayment, it should be possible for such companies to opt to apply the overpayment towards other tax liabilities and/or periods. We are aware through recent discussions at TALC that Revenue are now applying a position that this cannot be done until the company has filed its tax return, including iXBRL accounts, where relevant. While this might be reasonable for a claim for repayment of preliminary tax, we do not believe that it is a reasonable position to take for offset requests. We have seen Revenue issue interest demands for situations where the payment had been made and was sitting in Revenue accounts, but because it was not allocated to the correct period in time (due to certain filings being outstanding), it was treated as if the company had not paid any preliminary tax at that point in time. The purpose of the interest rules is to compensate the Exchequer for loss of revenue. In such cases there is no loss of Revenue, the amounts have been paid and received by the Exchequer, therefore, in our view, it is ludicrous to levy interest in such cases.
Content adapted from Finance Dublin Irish Tax Monitor.