Corporation Tax Self Assessment

CORPORATION TAX SELF ASSESSMENT

Corporation Tax Self Assessment (CTSA) is now in operation. It applies to accounting periods ending on or after 1 July 1999. It completed the self assessment reforms introduced for individuals some years earlier by extending the principles of self assessment to company tax returns.

However, for most companies the process of moving to CTSA was straightforward. This is because the previous Pay and File rules for the submission of returns and the payment of tax were substantially unchanged.

KEY CHANGES

the introduction of a ‘process now, check later’ enquiry regime
the inclusion in the tax return, and in a single self assessment, of the liabilities of close companies on loans and advances to shareholders and others, and of liabilities under Controlled Foreign Companies legislation
the requirement for companies with international businesses to self assess by reference to new transfer pricing legislation, without a direction from the Revenue.

CORPORATION TAX PAY AND FILE

As the name ‘Pay and File’ suggests, a company was required to pay the tax due in advance of filing the return and in the absence, at the time of payment, of a Revenue assessment. But ultimately a Revenue assessment lay at the heart of the system, and the process of assessment was the essential element upon which enforcement and compliance activity had to be based.

CTSA was essentially concerned with the conversion of the Pay and File system into a fully-fledged self assessment regime.

PRACTICAL EFFECT OF CHANGES FOR COMPANIES

Notice to file

The Revenue continue to issue a Notice to file for those companies which were submitting returns under Pay and File. In most cases, the return must be submitted to the Revenue within 12 months of the end of the accounting period.

Submission of the return

The return required by a Notice to file contains the company’s self assessment, which is final subject to

- taxpayer amendment
- Revenue correction, or
- Revenue enquiry.

The company’s right to amend a return (for example changing a claim to capital allowances) is similar to amendments under Pay and File. The company has 12 months from the statutory filing date.

The Revenue have nine months from the date the return is filed to correct any ‘obvious’ errors in the return (for example an incorrect calculation). This process should be a fairly rare occurrence. In particular the correction of errors does not involve any judgement as to the accuracy of the figures in the return. This is dealt with under the enquiry regime.

Enquiries

Under Pay and File, where a return could not be immediately agreed, the Revenue could ask questions of a company in order to judge the accuracy of the return. In practice, this generally meant that enquiries were made, either about specific technical aspects or about the whole of the company’s business. But there were no statutory powers regulating the scope of enquiries that could be made.

Under CTSA, the Revenue check returns and have an explicit right to enquire into the completeness and accuracy of any tax return. This right covers all enquiries, from straightforward requests for further information on individual items through to full reviews of a company’s business including examination of the company’s records.

The main features of the rules for enquiries under CTSA are

the Revenue has a fixed period, of at least 12 months from the statutory filing date, in which to commence an enquiry
if no enquiry is started within this time limit, the company’s return becomes final - subject to the possibility of a Revenue ‘discovery’
the Revenue will give the company formal notice when an enquiry commences.
the Revenue are also required to give formal notice of the completion of an enquiry, and to state their conclusions
a company may ask the Commissioners to direct the Revenue to close an enquiry if there are no reasonable grounds for continuing it.

Discovery assessments

The Revenue retains the power to make an assessment (a ‘discovery assessment’) if information comes to light after the end of the enquiry period indicating that the self assessment was inadequate as a result of fraudulent or negligent conduct, or of incomplete disclosure.

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SUMMARY OF SELF ASSESSMENT PROCESS

Example

A company prepares accounts for the 12 months ended 31 March 2001.

Key dates under CTSA are:

1.01.02	Payment of corporation tax
31.03.02	Filing of return
31.03.03	End of period for Revenue to open enquiry

On 31 March 2003 the company tax position is finalised subject to the Revenue’s right to make a discovery assessment in some circumstances.

PAYMENT OF TAX

There continues to be a single, fixed due date for payment of corporation tax, nine months and one day after the end of the accounting period (subject to the Quarterly Instalment Payment regime for large companies). The Pay and File pattern of late payment interest on tax paid late and repayment interest on overpayments of tax remains basically the same except for tax paid before the due date.

Credit interest

Under Pay and File a company did not receive any benefit from paying tax before the due date. Under CTSA a company receives credit interest on amounts paid early. The rate of interest will fluctuate and is 0.25% below the average base lending rate of clearing banks. So, if the average rate is 5% the credit interest rate is 4.75%. Any interest received is chargeable to corporation tax.

Loans to shareholders

If a close company makes a loan to a participator (for example most shareholders in unquoted companies), the company must make a payment to the Revenue if the loan is not repaid within nine months of the end of the accounting period. The amount of the tax is 25% of the loan. This tax is included within the CTSA system and the company must report loans outstanding to participators in the tax return.

Controlled Foreign Companies

A Controlled Foreign Company (CFC) is a non-UK company which is controlled by UK taxpayers and which operates in a ‘low tax’ country. If a UK company has a 25% interest in a CFC, it may need to include a share of the profits of the CFC in its tax due.

Transfer pricing

If a UK company has non-UK associates, the computation of profits may need to be adjusted to reflect transactions between the associates at market value. There are also record keeping regulations which require the UK company to demonstrate that the transactions have taken place at market value.

HOW WE CAN HELP

f we already deal with your corporation tax affairs, please be assured that we will continue to deal with the company’s tax in such a way that the transition from Pay and File to CTSA does not disrupt existing procedures.

Do not hesitate to contact us if you require any further information.

For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.

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