We are once again entering the final month of the year, and for most companies that also means the last month of the financial year. This is when there is still enough time to optimise numerous issues before the financial year effectively concludes. In this series we will shed light on a number of potential techniques for tax optimisation.
1. Introduction – ratio legis of advance payments
In order to calculate a company’s corporation tax, a corporation must submit a corporation tax return. Companies that keep their books per calendar year generally submit their corporation tax returns in September of the following year. Companies who do not work according to the calendar year must submit their corporation tax returns at the end of the month following the month in which the general meeting is held, with such no later than six months after the end of the financial year.
The tax authorities then calculate the taxes after receiving these returns, and send out an assessment notice based on these. The tax only has to be effectively paid at the end of the second month after the assessment notice was sent, which in many cases is over a year after the conclusion of the relevant financial year. In order to eliminate this ‘cash flow problem’ on the part of the government, the authorities have introduced a system of advance payments that is designed to encourage companies (and other taxpayers) to already pay their taxes during the course of the financial year.
2. Advance payments
They encourage the taxpayers to do this by raising the calculated taxes by a given percentage. In the 2017 assessment year (2016 financial year) the amount is 1.125 percent. This means that if you do not make advance payments you will have to pay 1.125 percent more in taxes than has been calculated.
But this increase can be avoided by making sufficient advance payments. These advance payments occur in four quarters, with each quarter having its own benefits. For financial years that are not longer or shorter than one year, the first quarter applies to all advance payments made up until the 10th day of the 4th month of the financial year, while quarter two holds for all payments made until the 10th day of the 7th month, quarter three applies until the 10th day of the 10th month and advance payments for the fourth quarter must be received no later than on the 20th day of the final month. If the aforementioned days are during the weekend or on a public holiday, then the final date is the following workday.
There are different benefits for each quarter. For the 2017 assessment year, a benefit of 1.5 percent applies to quarter one, 1.25 percent for quarter two, one percent for quarter 3 and just 0.75 percent for quarter four. These benefits can neutralise the charged increase.
It is however important to remember that at present there will be no increase from a legal perspective if the total increase is less than €40 or less than one percent of the tax to be paid. It is the latter restriction that is troubling the authorities this year.
3. Limited impact for the current year
Imagine that your company has been paying in the region of €100,000 in taxes for years. The increase due to insufficient advance payments will then be €1,125. You can easily setoff this increase by paying €25,000 in advance every quarter. When taken together with the abovementioned benefits, this will result in a net increase of €0.
But… imagine you only made an advance payment of €10,000 in quarter one, which gives us a benefit of €10,000 x 1.5% = €150. Our net increase is then €1,125 - €150 = €975 or less than one percent of the tax to be paid (100,000 x 1% = 1,000), which means you do not have to pay the increase. That means you can hang on to your hard-earned cash for a bit and just pay the taxman the following year when you receive your assessment notice.
4. Forgot to make the advance payments?
If you’ve forgotten to make your advance payments, then you must work out how much you should pay in advance in quarter four (before 20 December 2016) in order to avoid that increase due to insufficient advance payments.
Using the same example as above, with €100,000 in expected corporation tax, the increase will be €1,125. As soon as we get the net increase, after being offset with the benefits resulting from the advance payments, to below €1,000 (being one percent of the tax to be paid), the entire increase lapses. So at the very least a benefit of €126 must be obtained at a percentage of 0.75%, which in this example means a minimum advance payment of €16,800 or 16.8 percent.
So if you have forgotten to make advance payments, you can still pay 16.8 percent of your expected corporation tax before 20 December 2016 and you will avoid the increase implemented for insufficient advance payments. Given that the corporation tax ultimately payable cannot of course be accurately estimated before the end of the financial year, it is best to add a safety margin and pay around 20 percent in advance.
5. Legislative amendment
Naturally, the authorities also quickly spotted this benefit, and have already amended the law, which means that the increase on the grounds of insufficient advance payments will always amount to at least 2.25 percent as of the 2018 assessment year. That means it will become a lot more appealing to pay in advance.
Another important aspect in this respect is that the one percent threshold will no longer apply, which means you will always have to pay an increase on the grounds of insufficient advance payments, even if the net increase is less than one percent of the tax to be paid. The €40 threshold will however remain in place.
Even though it does not provide real advantages to make advance payments this year, it is still wise to pay a small portion of your taxes in advance so as to avoid the increase due to insufficient advance payments. As of next year it will once again be an appealing option to make advance payments, thanks to the combination of the percentage being doubled and the fact that the one percent threshold will lapse.