Payment of Corporation Tax by quarterly instalments

Companies whose profits exceed set thresholds, are treated as ‘large’ or ‘very large’ and may be required to make their Corporation Tax payments sooner than other companies, in four quarterly instalment payments (QIPs).

The idea behind the QIP regime is for large/very large companies to make a reasonable estimate of their current year Corporation Tax liabilities based on management accounts/available records. QIPs then have to be made based on these estimates, by specified due dates.

Together, the four payments should, collectively, match the eventual total liability. Any shortfall between the amounts paid and the final tax liability should be paid as soon as that final tax liability is known.

Unfortunately, HMRC charge interest on underpaid QIPs from the due dates for each payment and with interest rates currently running at 6.25%, these charges can accumulate to not insignificant sums, particularly if payments are missed. A higher rate of interest of 7.75% can apply if instalments are left unpaid, or underpaid, 9 months after the end of the period. It is important to note that HMRC charge interest based on the tax which should have been paid by reference to the final tax liability in the submitted tax return, rather than by reference to the amount companies have calculated to be due at the time the instalment payment was due.

The impact of the new ‘associated company’ rules may be to further reduce the large and very large company thresholds for accounting periods commencing on or after 1 April 2023 and this may result in more companies being caught by the QIP regime.

Your accountant will be able to assess whether your company is required to make QIPs and if so, let you know when these first become due for payment. They should also be able to assist in calculating the amounts of QIPs that may be due on an ongoing basis.

The remainder of this article aims to give a more detailed overview of the regime to help you understand how your company could be impacted, particularly in view of the new ‘associated company’ rules mentioned above.

When is a company large?

Subject to the impact of ‘related 51% group company’ rules and, from 1 April 2023, ‘associated company’ rules (see below), companies will be treated as large if their taxable profits (including dividends received from non-group companies) are more than £1.5 million.

If it is the first accounting period in which a company falls within this definition of ‘large’, the threshold is increased to £10 million. Therefore, growing companies that first become large with profits of less than £10 million have a one-year ‘period of grace’ before having to pay QIPs.

The £1.5 million and £10 million thresholds referred to above are reduced proportionately for accounting periods of less than 12 months. They are also divided by the number of ‘associated companies’ (see below).

If a company has a Corporation Tax liability of £10,000 or less, it will not be considered large, and will not need to pay Corporation Tax by instalments irrespective of its profit levels. This £10,000 threshold is reduced for accounting periods of less than 12 months.

When is a company very large?

A company is very large if its profits (including non-group dividends received) exceed £20 million. Again, this threshold is reduced by the number of associated companies. There is no ‘period of grace’ for a company that becomes a ‘very large’ company.

For accounting periods commencing before 1 April 2023, the £1.5 million, £10 million and £20 million thresholds were divided by the number of ‘related 51% group companies’. For accounting periods commencing on or after 1 April 2023, the thresholds are divided by the number of ‘associated companies’.

Under the ‘related 51% group company’ rules, companies are related if one company is a 51% subsidiary of another, or both are 51% subsidiaries of the same company. Companies under the control of a common individual were not therefore related 51% group companies.

However, under the new ‘associated company’ rules, companies are associated if one company controls another, or both are under the control of the same person or persons.

This may mean that companies that weren’t previously included under the ‘related 51% group company’ rules may now be included under the ‘associated company’ rules when determining whether a company has to pay its Corporation Tax by instalments, as the following example demonstrates.

Mrs A owns 100% of the shares in companies A, B and C but these companies are not in a corporate group.

Position prior to 1 April 2023

Companies A, B and C are not ‘related 51% group’ companies as none are 51% subsidiaries of any other. Each company would need to have taxable profits in excess of £1.5 million (or £10 million in the first accounting period that taxable profits exceed £1.5 million) to pay QIPs under the large company regime, or in excess of £20 million to pay QIPs under the very large regime, assuming a full accounting period of 12 months.

Position from 1 April 2023

From 1 April 2023, all three companies are ‘associated companies’ as they are all under the control of the same individual – Mrs A.  The large company QIP thresholds for each company are therefore £500,000 (a third of £1.5 million) and £3,333,333 (a third of £10 million). The very large company QIP threshold of £20 million would be reduced to £6,666,667.

This example is deliberately simplistic but illustrates that, with the introduction of the new ‘associated company’ rules from 1 April 2023, more companies are likely to be subject to the QIP regime.

The ‘associated company’ rules are complicated and can require the rights of ‘associates’ (broadly speaking, lineal family members but can also include some trust interests) to be considered when determining if two or more companies are under common control.

The rights of ‘associates’ held in other companies only need to be considered if there is substantial commercial interdependence between different companies. Companies can be interdependent on an economic, organisation or financial basis. It is not necessary for all three indicators of interdependence to be present – one is sufficient.

Economic interdependence

Two companies are economically interdependent if:

• The companies seek to realise the same economic objective or,
• The activities of one benefit the other or,
• The companies have common customers.

Financial interdependence

Two companies are financially interdependent if:

• One gives financial support (directly or indirectly) to the other or,
• Each has a financial interest in the affairs of the same business.

Organisational interdependence

Two companies are organisationally interdependent if the business of the companies have or use:

• Common management
• Common employees
• Common premises
• Common equipment

Example

House Limited is owned 40% by John, 40% by Jane and 20% by Karl. John and Karl are brothers.

Flat Limited is owned 75% by Leanne and 25% by Neil. John and Leanne are married. House Limited provides financial support to Flat Limited.

Because House Limited provides financial support to Flat Limited, HMRC would likely treat these companies as commercially interdependent (on a financial level). This means that the rights of ‘associates‘ would need to be considered in determining whether one individual, or the same individuals, control both of these companies. In this example, we have to attribute the rights of Leanne to John as they are ‘associates’ (through marriage).

No single individual controls House Limited. However, John owns 40% of House Limited and his brother (one of John’s ‘associates’) owns 20%, so John is treated as holding 60% of the shares in House Limited. John therefore controls House Limited. John is also treated as controlling Flat Limited, by virtue of Leanne’s 75% holding (which is attributed to him under the substantial commercial interdependence rules).

In this example, the thresholds for the large and very large QIP regimes in relation to House Limited would be divided by two. The large company thresholds would therefore be £750,000 and £5 million and the very large company threshold would be £10 million.

The rules can produce some unusual results – in the above example, House Limited is connected to Flat Limited, but from the perspective of Flat Limited, it is not connected to House Limited. This is because there is no requirement to attribute the rights belonging to associates of associates. So, whilst John’s rights are attributed to Leanne, Karl’s rights aren’t. Leanne only has a 40% interest in House Ltd as a result.

It is also important to remember that when determining the rate of Corporation Tax payable by a company i.e. the 19% small company rate, the 25% main rate, or the marginal rate of 26.5%, one needs to include the number of ‘associated companies’ in determining the thresholds which apply.

The attribution of rights of one’s ‘associates’ is a particularly complex area, with potential impact on both the timing of when Corporation Tax is due, as well as the rate of tax payable.

If you would like more information about the contents of this article speak to Clive Barron, Senior Tax Manager or Click here…