tax notes international - Tuck School of Business - Dartmouth College

and unable to pay their tax bills to spread payment of
their bills over a timetable they can afford.’’ All taxes
paid by businesses are covered: corporation tax, income
tax, value added tax on sales, income tax deducted
from the wages and salaries of employees, and
national insurance contributions. This is a nonstatutory
measure and therefore will not feature in the forthcoming
Finance Bill. It also means that if the Revenue do
not agree to a postponement, there is no right of appeal.
When it was first announced, some business proprietors
thought that it meant they were free to pay their
taxes when they wanted. Instead, it is a matter of negotiating
with someone in the BPSS a planned program
of payments for liabilities becoming due. It is not
an option open to all — only trading companies, sole
traders, and partnerships. The Revenue have set out
three conditions: The business must be in genuine difficulty,
unable to pay the tax on time, and likely to be
able to pay if it was allowed more time.
The real practical help for
these times has taken the
form not of rate cuts, but
of allowing businesses to
spread their tax payments
over an agreed period.
I have no experience of, nor have I heard of, any
anecdotal evidence of how this facility is working. According
to a January 14 press release, the Revenue state
that over 20,000 businesses had been allowed to defer
more than £350 million of taxes, which sounds impressive,
but averages out at only £1,750 each. The press
statement also claims that, in the majority of cases, it
can take the Revenue as little as 10 minutes to reach a
decision, although we are not told what that decision
is.
For sole traders and partners, any income tax that
remains unpaid 28 days after the due date attracts a 5
percent late payment surcharge and a further 5 percent
if it is still unpaid six months later. If a deferment plan
is agreed on, there is no surcharge imposed for late
payment. However, there is, of course, a price to pay,
and that is in the form of interest, currently 4.5 percent
(in other words, 3 percentage points above base rate).
When I had a real job and was running my own
practice on overdraft, I was being charged 2.5 percentage
points above my bank’s own base rate. This would
currently mean a rate of 4 percent; so the rate charged
by the Revenue is not too bad, at least at first sight. It
is easy to overlook the fact that interest charged on late
FEATURED PERSPECTIVES
payment of tax is not itself tax deductible. Depending
on the rate and type of tax being paid, it is an effective
gross rate of between 5.62 percent to 7.5 percent. So a
business with cash flow problems would be better using
its existing overdraft facilities if possible.
The problem is, of course, that many will probably
be at the limits of their permitted borrowings, and
therefore agreeing on a deferral plan with the Revenue
may be the only way out. Certainly it is much more
advisable than for the business proprietor to seek a personal
unsecured loan, which can carry interest of at
least 8 percent, which again would not be tax deductible
(or, for that matter, to stick his head in the sand
and hope the problem goes away).
Although 200,000 businesses were said to have
made use of this deferral option, I expect there will be
many more applications in the next couple of weeks.
Most companies in the U.K. tend to have a March 31
or December 31 year-end, and as the corporation tax
of small and medium-size companies is due nine
months after the year-end, many will have had to pay
the tax on October 1, 2008, for the year to March 31,
2008, or on January 1, 2009, for the year to March 31,
2008. Possibly the majority of the 200,000 businesses
referred to in the Revenue’s press release are in that
category. The next category to apply for deferment will
be the sole traders and partnerships. Their tax liabilities
are not as straightforward as companies.
To begin with, they are charged tax for a tax year,
not for the period for which they prepare their accounts.
The amount charged for an ongoing business
for the tax year 2007-2008, for example, will be the
tax-adjusted profits of its accounting period ending in
that tax year. As sole traders and partnerships are free
to choose whatever accounting date they wish, those
profits may have been earned as long ago as the year
to April 30, 2007, in the days when the word
‘‘subprime’’ had not entered into common parlance
and most people thought Northern Rock was a popular
dance. Income tax for 2007-2008 is payable by two
amounts, each being half of the final liability for the
tax year 2006-2007, due on January 31, 2008, and July
31, 2008, and a final ‘‘catch-up’’ payment on January
31, 2009, if the actual liability for the year turns out to
be more than that for the previous year, as it should do
if the business is growing.
Although a prudent small-business proprietor who
had made good profits in the year to April 30, 2007,
will make sure he has the cash available to pay the tax
when it comes due, life is not like that. Most business
proprietors pay last year’s tax out of this year’s income.
The problem is that there may not be any income
this year. On January 31, 2009, the proprietor is
therefore faced with having to pay a large tax bill on
income earned in the year ended April 30, 2007, which
has been spent when there’s nothing in the kitty this
year to pay it. But that’s not all — on that same date
TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 413
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