The ONS announced on 21 October that it would implement a new accruals methodology for corporation tax (CT) early in 2017. CT is currently scored on a cash basis (when it is received by HMRC). The new approach would time-adjust cash receipts so that they score closer to the time when the economic activity that created the CT liabilities took place.
In the July 2015 Budget, the Government decided to bring the CT payment date for large non-oil companies forward by four months from April 2017. In Budget 2016, it delayed the start of the policy to April 2019. With CT scored on a cash basis, this boosted receipts by £5.6 billion in 2019-20 and by £3.2 billion in 2020-21. In effect, the timing measure delivered a one-off boost to receipts on a cash basis – with the biggest boost in the surplus target year that applied in that Budget – without any change in underlying liabilities.
Eurostat guidance is that revenues recorded on a cash basis should be time-adjusted. The changes to the ONS methodology will be that:
- instalment payments by large non-oil companies prior to the CT timing measure: these are paid quarterly starting seven months after the start of the accounting period. They would be spread equally over the three-month period 4 to 6 months previously;
- instalment payments by large non-oil companies after the CT timing measure: these are paid quarterly starting three months after the start of the accounting period. They would be spread over the month they were received and the preceding two months (i.e. they would be accrued to the same months as prior to the measure). This takes out the yield from the timing measure; and
- payments by small companies: these are due nine months and a day after the end of the accounting period. They would be spread over the period from 10 to 21 months before they are paid. For example, receipts received in October 2016 relating to calendar year 2015 liabilities would be accrued back and spread over the whole of 2015.
In this forecast we have included only the effect that the new methodology would have on the scoring of the CT timing measure, taking out £5.6 billion from 2019-20 and £3.2 billion in 2020-21. We will include the effect on our underlying CT forecast at Budget 2017.
If a tax stream is rising over time and cash is received with a lag, measuring it on an accrued basis will raise the level of recorded receipts. Timing effects and rate cuts (e.g. the planned reductions in the CT main rate) may mean that accrued receipts are not higher than cash receipts in all years. The CT system is complex, so it is not possible to say precisely what the effect will be in each year until we are able to scrutinise the new approach in more detail. But one example of the likely effect would be that the sharp rise in small company CT that we forecast in 2017-18 would be accrued back to 2016-17, which could boost accrued CT by around £2 billion relative to the current cash treatment.
The ONS will also change the National Accounts accruals methodology for the bank surcharge and offshore CT. The bank surcharge was subject to the same timing measure as non-oil corporation tax. We have taken the effects of this timing measure (around £0.3 billion in both 2019-20 and 2020-21) out of this forecast and will include the effect on the underlying bank surcharge forecast alongside Budget 2017. We will also move to the new accruals methodology for offshore CT in our next forecast.