Finance: Beware the First of April ...

Company tax changes are looming, reports Roger Trapp

Companies have more reason than usual to sort out their financial affairs by the end of this month. Not only does next week bring the end of the tax year, but it also brings a change to long-standing rules on the taxation of interest and on all other aspects of corporate lending and borrowing. Every British company - large or small - will be subject to the system that comes into force on Monday.

The basis for the reform is straightforward enough - profits or losses on lending and borrowing will be either taxed or relieved on an "accruals" basis, like the company's accounts. That is, income and expenditure will be matched to the periods in which they occurred rather than when the bills were paid - so sweeping away the need for complex and artificial tax computations.

However, according to David Small, tax partner with accountants Ernst & Young, there are certain problems involved in the transition from the old to the new regime.

"If a company ignores the fundamental change, it may find itself taxed on profits after 1 April that it could have enjoyed tax-free before that date," he said. "Every company ought to review its lending and borrowing before 1 April."

If that is not enough cause for panic, he adds that, while the new system officially begins next week, certain parts can be retrospective as far back as 1 May 1995. Accordingly, it may already be too late for some.

The changes have their roots in a consultative document on the reform of corporate and government debt published by the Inland Revenue in May 1995. The aim was to assist the development of a "gilt strips market" and so encourage investments in gilts and reduce pressure on the public sector borrowing requirement.

Nearly a quarter of the latest Finance Bill is devoted to the proposals on gilts and bonds. And just to ram home the importance of the issue, Ernst & Young has published a guide to these plans, called Corporate Debt Tax Reform - What Do I Need to Know?

The firm says it welcomes proposals that will simplify the tax system. But it is worried that the rush to introduce them may not make simpler better. "The draft rules contain all sorts of traps and loopholes because of the speed at which the changes are being rushed through. There is a risk that the new tax rules will be a bigger mess than the existing ones," added Mr Small.