SCHEDULE D: COMPUTATION (Hansard, 12 July 1989)

§ Mr. Norman Lamont
I beg to move amendment No. 98, in page 30, line 28, at end insert— '(5C) In a case where the period of account mentioned in subsection (1)(a) above begins before 6th April 1989 and ends before 6th April 1990, the references in subsections (1)(c), (3)(b), (4) and (5)(a) above to nine months shall be construed as references to eighteen months.'.

§ Madam Deputy Speaker
With this it will be convenient to take Government amendment No. 99.

§ Mr. Lamont
Clause 43 provides that in calculating an employer's profits for tax any remuneration still unpaid nine months after the end of the period of account in which it was earned and for which it was charged should be deducted not for that period but for the period in which it is eventually paid. Clause 44 applies similar provisions to investment and insurance companies. The purpose of the clauses is to ensure that there is not too long a gap between the time at which the employer gets tax relief for the payment of emoluments, and the time at which those emoluments are assessed to tax in the hands of the particular employee under the receipts basis. Without the provisions in the clauses an employer could get a deduction for remuneration which remained unpaid for a long time—perhaps indefinitely.
The new rules apply to calculations of profits for periods ending after 5 April 1989. Since publication of the Bill, representations have suggested that some companies may not be able to adjust their accounting arrangements immediately to determine and therefore pay remuneration within nine months of the end of an accounting period. My hon. Friend the Member for Croydon, South (Sir W. Clarke) may have been hinting at that. The consequence would be, in the short term, before people could adjust to the new regime, that companies would unexpectedly have to pay more tax because they would not get a deduction for unpaid remuneration, leading to cash flow problems in some cases. Where company accounts were more than 12 months in arrears, and were then brought up to date to satisfy the new rules, there would be a "bunching effect" on the payment of remuneration. That would result from more than one year's remuneration being paid in one tax year so that the company can comply with the nine-month time limit and get its deduction for the remuneration. In that situation some employees could find themselves paying tax at the higher rate where they would not otherwise have done so. To ease any transitional difficulties of this kind and to allow companies which need 1034 to change their accounting arrangements a longer period to adjust to the new rules, the amendments provide that for a business's first period of account ending after 5 April 1989, the period during which remuneration must be paid if there is to be a deduction in that period of account is to be 18 months rather than nine months.
The amendment extends the period at the introduction of the new receipts basis to enable companies to get up speed in the preparation of their accounts.