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HM Treasury

Pre-Budget Report

In Rev 1

25 November 1997

IR 1: A modern system for corporation tax payments

Advance corporation tax (ACT) is to be abolished from 6 April 1999, and the main rate of corporation tax is to be cut by 1 per cent to 30 per cent from 1 April 1999.

The Chancellor Gordon Brown announced these changes in his pre-Budget report today, together with the introduction of quarterly instalment payments of corporation tax by large and medium-sized companies, which will be phased in over four years from 1999. The details of this move to a modern system for corporation tax payments are contained in a consultative document issued today.

Announcing the changes now will provide certainty for companies, allow time for consultation with business and give people the opportunity to prepare. The changes will considerably simplify the company tax regime. Companies will be able to take a whole range of business decisions without having to worry about ACT and, more particularly, surplus ACT. Many companies have already said they would welcome this.

Details

  1. Surplus ACT

    Arrangements for the use after 1999 of surplus ACT built up in the period to then will substantially preserve companies’ existing expectations as to its recovery.

    Quarterly instalment payments

  2. From 1999, large companies will start to pay their corporation tax in four equal quarterly instalments on the basis of anticipated current year liabilities. Quarterly instalments will begin in month 7 for twelve month accounting periods, so two of them will be in-year. Medium-sized companies will pay half their corporation tax in instalments on the same basis as for large companies, and the other half as now. Small companies will not have to pay any corporation tax by instalments.
  3. The change to quarterly instalment payments of corporation tax by large and medium-sized companies will begin at the same time as self assessment for companies is introduced, which means it will affect accounting periods ending on or after 1 July 1999. The two start dates have deliberately been aligned. Announcing them on the same day means that detailed preparations for both changes can be made at the same time.
  4. The introduction of quarterly instalment payments of corporation tax for large and medium-sized companies will bring the United Kingdom into line with other major industrial countries, which already require companies to pay their corporation tax bills in instalments.

    Quarterly accounting for gilt interest

  5. The scheme under which companies have to account quarterly for income tax on gilt interest they receive gross will be scrapped from 1 April 1999.

    International holding companies

  6. The abolition of ACT means there will be no need beyond 1999 for special rules for international holding companies’ dividends paid out of foreign income.

    UK investment funds

  7. Authorised unit trusts and UK open-ended investment companies are covered by the changes, because they are taxed like companies. Their corporation tax rate will continue to be linked to the lower rate of income tax.

    Shareholders’ dividends

  8. There will be no significant further change in the way shareholders’ dividends are to be taxed from 1999.

    Consultative document

  9. The consultative document provides details of the move to a modern system for corporation tax payments. Copies (price 4 Pounds) can be obtained post free by sending a cheque or a postal order (payable to Inland Revenue) to:

    Inland Revenue Reference Library
    Ground Floor
    South West Wing, Bush House
    Strand
    London
    WC2B 4RD
  10. Personal callers can buy copies by cheque or cash between 9.00am and 5.00pm on weekdays from:

    Inland Revenue Information Centre
    South West Wing, Bush House
    Strand
    London
    WC2B 4RD
  11. The consultative document is also available on the Internet at: http://www.hm-treasury.gov.uk/.
  12. Representations on the matters discussed in the consultative document should be sent to:

    Alex Plant Inland Revenue
    Company Tax Division
    Room S95, West Wing
    Somerset House
    Strand
    London
    WC2R 1LB.

    They should reach him by Friday, 30 January 1998.

Notes for editors

  1. Corporation tax payments

    At present, a UK company has to account for ACT at a rate of 20 per cent when it pays dividends or makes other qualifying distributions. Mainstream corporation tax is currently paid nine months from the end of a company’s accounting period. ACT can be set against the company’s mainstream corporation tax bill within certain limits. ACT which exceeds those limits is carried forward as surplus ACT.

    Categories of company

  2. Very broad definitions of the different categories of company are given below. In each case, where there are associated companies, the limits shown are reduced to the figures found by dividing those limits by one plus the number of associates.
  3. Large companies are those whose tax profits are at least pounds 1.5 million a year. They generally pay corporation tax at the main rate.
  4. Medium-sized companies have tax profits of between pounds 0.3 million and pounds 1.5 million per annum. In most cases they pay corporation tax at the main rate, but receive marginal small companies relief which reduces the effective rate of corporation tax.
  5. Small companies are companies with tax profits of up to 0.3 million Pounds a year. They usually pay corporation tax at the small companies’ rate.

    Quarterly instalment payments

  6. The consultative document includes details of:
    • how quarterly instalment payments of corporation tax by large and medium-sized companies will work; and
    • the four-year transition to quarterly instalment payments.

    Self assessment for companies

  7. The start date for self assessment for companies was announced today in a separate Inland Revenue press release called "Self assessment for companies".

    Quarterly accounting for gilt interest

  8. Quarterly accounting for gilt interest (QAGI) was introduced when the last Government allowed gross payment of gilt interest. It currently collects income tax quarterly on gilt interest received by companies, and so maintains the previous Exchequer cash flow. Payment by larger companies of corporation tax by quarterly instalments will mean that QAGI is no longer needed.

    Shareholders’ dividends

  9. The way in which shareholders’ dividends and other qualifying distributions they receive are taxed from 1999 will be as set out in the 2 July press release entitled "Companies and their shareholders: tax changes to promote investment by companies" (Inland Revenue 2).

    Simplification

  10. The move to a modern system for corporation tax payments will enable over 75 pages of existing legislation to be removed from the statute book.

    International comparisons

  11. The company tax payment systems in other major industrial countries are in many cases stricter than the one to be introduced in the UK. High level summaries for Australia, Canada, France, Germany, Japan and the United States are contained in the consultative document.

    Revenue effects

  12. The consultative document also sets out the estimated effects of the move to a modern system for corporation tax payments on tax receipts.

Media enquiries to: 0207 438 6692/6706/7327 (Out of hours: 0860 359544)

Inland Revenue Press Releases are available from the Inland Revenue web site.

External links


Pre Budget 1997 Press Notices index page

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