Corporation Tax

Revised Arrangements for Payment of Preliminary Corporation Tax

Introduction

Section 58 of the Finance Act 2002 (amending Section 958 TCA 1997) brings forward the date for payment of preliminary CT. The changes apply to CT due in respect of accounting periods ending on or after 1 January 2002. The general effect of the changes is that PT is due for payment one month before the end of the accounting period (previously six months after the end of the accounting period). The change is being introduced over a five year transition period during which the proportion of PT to be paid at the earlier date will be progressively increased. It will be fully effective for accounting periods ending after 2005.

Dates for Payment

During the transition period there will be three dates for payment of CT in relation to each accounting period:

• The first instalment of PT will be due thirty-one days before the end of the accounting period (but not later than the 28th day of the month in which it is payable)
• The second instalment of PT will be due within six months after the end of the accounting period (but not later than the 28th day¹ of the month in which it is payable)
• Assuming the PT rules have been complied with, the balance of CT will be due one month after an assessment has been made (no change).

However there are two derogations from the rules outlined in the preceding paragraph:

As a transitional arrangement for 2002 only, the first instalment of PT is not payable before 28 June 2002. The practical effect is that, for all accounting periods ending between 1 January 2002 and 31 July 2002, the first instalment of PT will be payable on 28 June 2002. [Note: Companies with accounting periods ending 31 December 2001 will also be required to pay their PT on 28 June 2002, but this payment arises under the previous payment arrangements rather than the new arrangements outlined in this note.]

• Where an accounting period is less than one month and one day the due date for payment of the first instalment of PT is the last day of the accounting period (but not later than the 28th day 1of the month in which it is payable).

When the transitional period has concluded (i.e. for accounting periods ending after 2005) all the PT payable will be paid in the first instalment and the second instalment will no longer apply.

The due date for submission of the CT return remains nine months after the end of the accounting period.

First Instalment of Preliminary Tax

The amount to be paid in the first instalment of PT is as follows:

• For accounting periods ending in 2002, 18% of the tax liability for the chargeable period or, in the case of a small company,^* 20% of the corresponding tax liability for the preceding chargeable period^** if this is lower
• For accounting periods ending in 2003, 36% of the tax liability for the chargeable period or, in the case of a small company,^* 40% of the corresponding tax liability for the preceding chargeable period^** if this is lower
• For accounting periods ending in 2004, 54% of the tax liability for the chargeable period or, in the case of a small company,^* 60% of the corresponding tax liability for the preceding chargeable period^** if this is lower
• For accounting periods ending in 2005, 72% of the tax liability for the chargeable period or, in the case of a small company,^* 80% of the corresponding tax liability for the preceding chargeable period^** if this is lower
• For accounting periods ending in 2006 and subsequently, 90% of the tax liability for the chargeable period or, in the case of a small company,^* 100% of the corresponding tax liability for the preceding chargeable period^** if this is lower.

Second Instalment of Preliminary Tax

The amount to be paid in the second instalment of PT is an amount that, when added to the first instalment of PT is equal to 90% of the tax liability for the chargeable period.

Example:

For an accounting period ending in 2002, if the tax liability for the chargeable period is €100,000 and the first instalment of PT was €18,000, the second instalment would be €72,000.

For accounting periods ending in 2006 and subsequently, payment of the second instalment of PT will no longer arise.

Small Companies

As indicated earlier in this article, a small company has the option of basing its first instalment of PT on the corresponding tax liability for the preceding chargeable period, if it would be more advantageous to do so.

A small company is one where the tax liability for the preceding chargeable period does not exceed €50,000 provided the preceding chargeable period equals twelve months. Where the preceding chargeable period was less than twelve months, the liability has to be “annualised” to determine whether or not the company qualifies as a small company.

Example

If the preceding chargeable period was six months and the tax liability was €24,000, the company qualifies as a small company as the annual figure would be €48,000. If the tax liability was €26,000 the company would not qualify as a small company as the annual figure would be €52,000.

Depending on changes in CT liability from time to time, a company may qualify as a small company for some accounting periods and not for others.

Having determined that the company qualifies as a small company, the first instalment of PT can be based on the corresponding tax liability for the preceding chargeable period. The concept of “corresponding tax liability” arises because the preceding chargeable period and the current chargeable period may be of different lengths. The corresponding tax liability is determined by the formula:

where

• T is the CT payable for the preceding chargeable period
• C is the number of months in the current chargeable period and
• P is the number of months in the preceding chargeable period.

Examples:

Preceding chargeable period was six months, where the tax liability was €10,000. Current chargeable period is twelve months, so the corresponding tax liability is determined as follows:

Preceding chargeable period was twelve months, where the tax liability was €10,000. Current chargeable period is six months, so the corresponding tax liability is determined as follows:

Where the preceding chargeable period and current chargeable period are of the same length the tax liability for the preceding chargeable period equates to the corresponding tax liability.

The relevant percentage is then applied to the corresponding tax liability to determine the amount to be paid as the first instalment of PT. However, a company is not obliged to use this method if it would be more advantageous to base the first instalment on the tax liability for the current chargeable period.

In the first accounting period a company has no preceding chargeable period and so cannot avail of the small companies preceding year rule in arriving at the first instalment of PT due. However, as a matter of practice where a company’s first year’s CT is not going to exceed €50,000, then a first instalment payment of “nil” PT would be accepted as meeting the PT obligations for the first instalment. The second instalment of PT would then have to amount to 90% of the total liability.

“Top-Up” Payments

Because the first instalment of PT has to be paid before the end of the accounting period, a special provision applies to cater for the situation where additional liabilities, in the form of chargeable gains on disposals, arise in the final month of the accounting period. Where this situation arises a company is permitted to make a further payment of PT a “top-up payment”. Where such a company correctly pays the first instalment of PT (but disregarding the gains in the final month), and makes a top up payment one month after the end of the accounting period to bring total payments up to the required level, the company will be regarded as having met its PT obligations.

There is no provision for a top up payment in relation to close company loans to participators. Neither is there provision for a top-up payment in relation to medical insurance payments for employees.

Income Tax Payable by Companies

In relation to income tax on “perks”, such payments which fall due by virtue of Section 112A (3) form part of the PT for the year by virtue of Section 952(2) and hence are subject to the same rules in relation to timing as the rest of the CT payable for the period. The payment of this income tax should be in accordance with PT and balancing payment rules, for example for 2002 : 18% due with the first instalment of PT; 72% due with the second PT instalment; the balance of CT, 10%, due within 1 month of assessment date.

This applies also to all types of income tax payable by a company under Section 239 TCA 1997 (e.g. income tax withheld on royalties paid). In accordance with Section 239(11)(a) TCA 1997 the income tax due is treated as CT for the purpose of charge, assessment and collection and is therefore subject to the same PT and balancing payment rules.

Failure to Comply with Preliminary Tax Requirements

Where a company fails to comply with the PT requirements (either by failing to pay a sufficient amount or by failing to pay by the relevant due date(s)) the due dates for the payment of the CT liability for the chargeable period are brought forward as follows:

• For accounting periods ending in 2002, 20% of the liability on the due date for the first instalment of PT and 80% of the liability on the due date for the second instalment of PT
• For accounting periods ending in 2003, 40% of the liability on the due date for the first instalment of PT and 60% of the liability on the due date for the second instalment of PT
• For accounting periods ending in 2004, 60% of the liability on the due date for the first instalment of PT and 40% of the liability on the due date for the second instalment of PT
• For accounting periods ending in 2005, 80% of the liability on the due date for the first instalment of PT and 20% of the liability on the due date for the second instalment of PT
• For accounting periods ending in 2006 and subsequently, 100% of the liability on the due date for PT and interest charges will arise accordingly.

Issue of Preliminary Tax Reminder Letters

Following previous practice, PT reminder letters will issue to companies in advance of the due dates for payment of instalments of PT. These letters will incorporate the relevant payslips for payment of the PT. Companies should note, however, that these reminder letters will be based on the accounting period end date on record for each company. Where a company changes its accounting period, arrangements should be made to notify Revenue so that the reminder letters (and return form) can be issued at the appropriate time.

Submission of returns and payment of CT can also be made through ROS.

Further Information

Any further information required in relation to the operation of the revised rules for payment of preliminary corporation tax can be obtained by contacting:

Technical Services,
Office of the Collector-General,
Sarsfield House,
Francis Street,
Limerick.