and unable to pay their <strong>tax</strong> bills to spread payment <strong>of</strong> their bills over a timetable they can afford.’’ All <strong>tax</strong>es paid by businesses are covered: corporation <strong>tax</strong>, income <strong>tax</strong>, value added <strong>tax</strong> on sales, income <strong>tax</strong> deducted from the wages and salaries <strong>of</strong> 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 <strong>of</strong> appeal. When it was first announced, some business proprietors thought that it meant they were free to pay their <strong>tax</strong>es when they wanted. Instead, it is a matter <strong>of</strong> negotiating with someone in the BPSS a planned program <strong>of</strong> 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 <strong>tax</strong> 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 <strong>of</strong> rate cuts, but <strong>of</strong> allowing businesses to spread their <strong>tax</strong> payments over an agreed period. I have no experience <strong>of</strong>, nor have I heard <strong>of</strong>, any anecdotal evidence <strong>of</strong> 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 <strong>of</strong> <strong>tax</strong>es, which sounds impressive, but averages out at only £1,750 each. The press statement also claims that, in the majority <strong>of</strong> 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 <strong>tax</strong> 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, <strong>of</strong> course, a price to pay, and that is in the form <strong>of</strong> 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 <strong>of</strong> 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 <strong>of</strong> <strong>tax</strong> is not itself <strong>tax</strong> deductible. Depending on the rate and type <strong>of</strong> <strong>tax</strong> being paid, it is an effective gross rate <strong>of</strong> 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, <strong>of</strong> course, that many will probably be at the limits <strong>of</strong> 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 <strong>of</strong> at least 8 percent, which again would not be <strong>tax</strong> 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 <strong>of</strong> this deferral option, I expect there will be many more applications in the next couple <strong>of</strong> weeks. Most companies in the U.K. tend to have a March 31 or December 31 year-end, and as the corporation <strong>tax</strong> <strong>of</strong> small and medium-size companies is due nine months after the year-end, many will have had to pay the <strong>tax</strong> 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 <strong>of</strong> 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 <strong>tax</strong> liabilities are not as straightforward as companies. To begin with, they are charged <strong>tax</strong> for a <strong>tax</strong> year, not for the period for which they prepare their accounts. The amount charged for an ongoing business for the <strong>tax</strong> year 2007-2008, for example, will be the <strong>tax</strong>-adjusted pr<strong>of</strong>its <strong>of</strong> its accounting period ending in that <strong>tax</strong> year. As sole traders and partnerships are free to choose whatever accounting date they wish, those pr<strong>of</strong>its 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 <strong>tax</strong> for 2007-2008 is payable by two amounts, each being half <strong>of</strong> the final liability for the <strong>tax</strong> 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 pr<strong>of</strong>its in the year to April 30, 2007, will make sure he has the cash available to pay the <strong>tax</strong> when it comes due, life is not like that. Most business proprietors pay last year’s <strong>tax</strong> out <strong>of</strong> 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 <strong>tax</strong> 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 (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
FEATURED PERSPECTIVES he has to pay the first installment <strong>of</strong> his 2008-2009 liability, which is half <strong>of</strong> the large 2007-2008 liability based on his pr<strong>of</strong>its for the year to April 30, 2008, a year when we had heard <strong>of</strong> subprime and Northern Rock, but before the recession hit. Those pr<strong>of</strong>its may have been equally as high as the previous years, so a real problem exists. The reality is that instead <strong>of</strong> the business having to go to its bank to ask for a loan to pay the <strong>tax</strong> (which it probably will not get), the government is taking over the role <strong>of</strong> banker and lending the business the money instead. Once more, we have to ask, ‘‘Do we really need the banks?’’ ◆ 414 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
- Page 1 and 2: tax notes international Volume 53,
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