The CTSA regime has the same key features as self-assessment for individuals. Superficially, it appears similar to the existing pay-and-file system. Companies will be required to self-assess their own tax liability, file a return and pay that liability – by instalments, if appropriate.
It is the payment by instalments that will have the greatest impact on businesses over the next four years. When CTSA is fully operational, companies liable to corporation tax at the full rate will have to pay their tax for an accounting period in four quarterly instalments, with the final instalment due three months and 14 days after the end of the period, whereas the current system requires a single payment nine months after the year end.
Even the Inland Revenue has realised that companies will struggle to pay two years' worth of tax bills in one instalment, so the instalment system is to be phased in over the next four years.
Consider a large company with a 31 December year end and the same corporation tax liability each year. What affect will the transition to CTSA have on its cash flow? As the table shows, in the year ended 31 December 1999, the company must pay 130% of its normal corporation tax liability. However, the worst period is the 12 months ending 31 July 2000, during which the company must fund 163% of its normal payment. That is, the shaded amount in the panel, which is made up of two instalments from 1999 and three from 2000.
Many construction companies that are already battling the adverse economic conditions facing the industry will find this additional cash-flow burden a heavy one.
It will be particularly unwelcome following the Inland Revenue's moves to have subcontractors recategorised as employees, with the additional consequential national insurance contributions cost.
The fundamental difference between CTSA and pay-and-file is that you, not the Revenue, are responsible for monitoring and applying the correct principles in determining the corporation tax payable by your company.
Although you will have primary responsibility for determining your company's liability, this does not mean that the Revenue will no longer be involved. Only its approach will change. When your return has been submitted, there will be no formal agreement or notification of satisfaction from the inspector.
Instead, a number of returns will be selected to be subject to detailed inquiry. The inspector will have 12 months from the submission of the return, or the due date if later, to begin an inquiry.
Under the new inquiry regime, the Revenue will be entitled to access the business records supporting the entries in the return. Apart from the obvious drain on resources from having to deal with the Revenue's investigations, pity the poor accountant trying to recall the detailed reasons for creditors and provisions 12 months after the fact. Pressure to complete financial statements will have prevented many accountants from noting them at the time.
The detailed contemporaneous recording of the background to creditors, provisions for rectification work and the valuation of stock and work in progress could be vital to the speedy conclusion of a Revenue random audit. In this article, it has only been possible to touch on a few aspects of CTSA that are likely to be of most relevance to the construction industry.
Not since the introduction of PAYE has tax legislation had such a profound financial and commercial impact on businesses. Companies are well advised to seek specialist help about the impact on their own situation.
Carol Barrie is head of tax at the Midlands division of chartered accountant Robson Rhodes.