It took elephants in Hyde Park, personal appearances by George Best and a nation-wide TV campaign to tell personal taxpayers about the introduction of self-assessment. Despite this, the Inland Revenue is taking a low-key approach to the launch of the self-assessment system for company tax.
The reason, the Revenue claims, is that corporate self-assessment is not a radical departure from the existing pay-and-file system. Companies have always had to file a tax return and the deadline for filing this return has already toughened over the past few years.
But changes are afoot and FDs need to be fully aware of self-assessment and the consequences or face stringent penalties that could be revised in the March Budget.
Gordon Brown set a formal date for the start of corporate self-assessment in November’s Green Budget. The new system will apply to all accounting periods ending on or after 1 July 1999. This means that some companies are barely four months away from the start of the first tax year that will be affected by this change.
FDs need to quickly assess exactly what company self-assessment involves, how it will affect them, and what they need to do now to prepare.
Unfortunately, the Revenue is not saying a word for the time being. The official line is that there is nothing to talk about until the Chancellor unveils his plans in March. This does little to reassure companies which could face substantial penalties if they get their preparations wrong.
On the whole, the principles underlying corporate self-assessment will be the same as they are for the individual taxpayer. “Basically, it is very similar to individual self-assessment in that when a company fills in its tax return it will in effect be assessing its own return. You are creating your own demand for tax,” explains Richard Baron, taxation director at the Institute of Directors.
The main principles of the existing pay-and-file system will not change because a company will still pay the money and file the return, adds Baron, but the difference is that it puts final responsibility on the taxpayer.
At the end of the day, it is this shift in responsibility that is at the heart of self-assessment. The actual tax return form itself is not expected to be radically altered, although the design has not been finalised yet. Once the form has been returned, and unless the Revenue makes any enquiries, a company’s tax position will normally be regarded as finalised 12 months after the filing date.
If this happens, the finance director can breathe a sigh of relief until the next year. However, if an enquiry is called into the company’s accounts then it could be a stressful procedure, even if the FD is confident about the accounts.
Enquiries are often time-consuming affairs that may keep the directors from running the business. But at least prior to the introduction of self-assessment the Revenue had to give a solid reason why it was investigating a company’s accounts. That is now going to change.
Under self-assessment the taxman will be given the power of random enquiry.
This means that the Revenue will be able to launch an enquiry without the need to give a specific reason beforehand, putting companies in a wait-and-see situation once they have filed their return. The Revenue is more likely to concentrate on company tax returns rather than those of individual taxpayers. Baron estimates that the Revenue will only look at around 0.1% of those individual self-assessment returns where there is no reason to suspect any wrongdoing. This, he believes, is simply because of a lack of manpower, but he is certain the Revenue will look at a much higher percentage of companies.
“The Revenue will concentrate more on companies because there are fewer of them – and all the big companies will automatically get an enquiry opened,” he explains. “This may not be because it suspects those companies, but because an enquiry will be the only statutory right for the Revenue to make adjustments – and such large companies will always have adjustments to make.”
This was a view supported by Tony Elgood, head of active tax management for Coopers & Lybrand, who believes the Revenue will use this power of random enquiry to its own advantage.
“From the Revenue’s point of view, it can choose which companies and which particular areas it looks at – and it will be selective,” says Elgood. “It will pick on large companies and will look at areas it thinks are the best money-spinners. It has always had the power to investigate but this gives it the scope for a much more focused approach.”
You would expect that if a company has not deliberately fiddled its tax then it should have little to worry about from an enquiry, but this argument does not always ring true.
Deciding what is taxable and what is not taxable is not always a straightforward procedure, so many companies will face the prospect of adjusting their submitted returns after the deadline has passed. For example, even the smallest of companies could have difficulties deciding what can and cannot be deducted under capital allowances, and if the Revenue disagrees with its final decision it could prove a costly mistake for the company.
There is a world of difference between a carefully thought-out estimate and irresponsible guesswork, but the financial penalty for error and deliberate fraud at the moment is the same. And under self-assessment, the time lag between filing your return and the Revenue making any necessary adjustments could increase this penalty further.
Under the current pay-and-file system, if a company is up to three months late with its tax return it will face a fixed #100 fine. This fixed penalty will increase to #200 if the company has still not handed in its form once the three months have passed. On top of this, if a company is later with its submission it faces geared penalties based on the tax owing as well.
A company must currently pay an extra 10% of the tax owing if it fails to hand its return in 18 months after the initial deadline, and this goes up to 20% of the tax owing once a period of two years has elapsed. At the moment it seems that these penalties may well be carried over into self-assessment, but there is the possibility that they may be subject to change in Gordon Brown’s March Budget.
The Federation of Small Businesses has already called for a one-year period of grace to ease companies gently into the new system. This could act as a warning to companies to take more care when submitting their returns the following year.
Stephen Alambritis of the FSB says: “In the first year of the new system’s operation, businesses should be informed of the fines that they would have had to pay due to mistakes – for example, submitting their form late – but the fines should not be collected. It would be kind of a suspended sentence.
“The Revenue is planning to make redundancies in the inspectorate and has passed its work on to the taxpayer. It’s an easy way out for the Revenue and the extra work will land on the desks of finance directors through no fault of their own,” he adds.
As under pay-and-file, at the end of the day self-assessment will require a company official to sign and guarantee that the tax return is 100% correct and, in practice, this is usually the company’s finance director. It will be finance directors who are in the firing line if mistakes are made and there is no doubt that they will be spending extra time and resources checking through the final return.
This will be particularly true of FDs in larger, international companies as both transfer pricing and controlled foreign companies are to be brought within the scope of self-assessment. A company will have to own up and tell the taxman that it owes more tax, rather than wait for the Revenue to come to them.
All of this will undoubtedly result on FDs having to disclose more information and more detailed records to the Revenue. Some FDs may wish to do this anyway, using disclosure as a kind of safeguard to show they have nothing to hide in case their return is queried in the future, but whether this will cut any ice with the Revenue remains to be seen.
On top of this, the FDs of medium and large-sized businesses will also be dealing with the introduction of quarterly payments of corporation tax which have replaced advanced corporation tax. They must be doubly sure that they are fully aware of their company’s tax position.
Companies cannot afford to fall behind with their record keeping and they must be able to access up-to-date records quickly and efficiently.
Nicholas Woolf, tax partner with Arthur Andersen, emphasises that FDs need to be in a position where they can comfortably file a tax return and stand by it, but he adds, this should not be a particularly onerous task if companies take adequate steps to prepare for self-assessment.
“All new processes have uncertainty. The first time you experience any new system you feel the pain of change, but self-assessment naturally follows on from the modern system,” says Woolf.
But Elgood is not convinced companies are ready for the introduction of self-assessment. “Some companies have made preparations for self-assessment but there’s a significant number who will always leave it to the last minute. Tax tends to be something that is dealt with as it happens,” he explains.
Elgood believes companies need to manage their tax accounts much more thoroughly if they are to survive under self-assessment and outlines what they need to do to ensure they are adequately prepared.
Initially, a company needs to confirm that ownership and accountability for the tax charge is at the correct level. This means making sure someone senior is taking control of the situation as it is too important an issue to delegate to a tax junior.
A company’s IT support must be right up to date if it is going to be able to cope with the new demands of self-assessment. Even at a basic level, IT is essential and a more traditional, manual system may prove too slow to meet the new deadlines. For example, most companies have to sort out which legal and professional costs are taxable and doing this by hand after the year-end will be too late under self-assessment. Invoices need to be coded as they come in so that they can be quickly sorted when they are needed.
Only adequate preparation will minimise the pain that the new system will cause.
Joanne Offer is a freelance journalist.
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