Advance corporation tax will be abolished from April 1, 1999 and the famous instalment method of payment of corporation tax announced in the Green Budget last November has been firmed up in the actual Budget. There are, however, some important changes.
From April 1, 1999, small and medium-sized companies will pay their entire corporation tax bill nine months after the end of the accounting period. This means that the complex instalment method for medium-sized companies (with profits between £300,000 and £1.5m) has been abandoned.
All other large companies will pay tax in quarterly instalments starting six months and 14 days after the commencement of the accounting period. There will be a four- year phasing-in period.
A planning point that arises from this is that, if possible, for large private companies, it would be beneficial to create deductions to bring them down to medium-sized by reducing taxable profits. This will mean not only a reduction in corporation tax payments but also a considerable delay in actually making the payments as outlined.
Deductions may be created by payments to exempt approved pension arrangements, funded unapproved retirement benefit schemes and salaries. Dividend payments do not create the effect as they are, of course, not deductible from profits.
There are further changes to the actual rates of corporation tax, with some firm commitments from the Government. From April 1, 1999, the large companies' rate will be 30 per cent (previously announced) but there is a commitment that this rate will not be higher during the rest of this Parliament – in fact, the rate could go lower. The smaller companies' rate from the same date drops to 20 per cent from 21 per cent, again, with a similar commitment.
The effective marginal rate of corporation tax for medium- sized companies on their profits in excess of £300,000 will be 32.5 per cent from April 6, 1999.
Creating deductions by the ways outlined above to save corporation tax at the stated rates remains as important as ever.
Staying with private limited trading companies, the effective capital gains tax rate of 10 per cent for long-term (10 years) held assets could mean that CGT becomes much lighter on the disposal of such a business – this could weaken the argument for reducing the value of a companies over time by substantial pension contributions.
The balance, however, could swing back to this planning by the freezing of indexation and the phasing out of retirement relief. It is a balancing act and careful individual planning will be needed.