It is important that you know your company’s own individual profit threshold where, if exceeded, it has to start paying corporation tax by quarterly instalments. If you miss this, HMRC will charge the company interest on any overdue tax from each instalment due date. HMRC can also charge a penalty if a company deliberately fails to make instalment payments or deliberately makes payments that are too low.
If a company’s annual taxable profit (plus certain dividend income) for an accounting period is more than £1.5million, but not exceeding £20million, it is classed as a large company for corporation tax payment purposes.
However, the £1.5million threshold can be reduced and this is what catches people out. The main way that the £1.5million threshold is reduced is if a company has “associated companies” and this is an important change from 1 April 2023.
Associated companies
Before April 2023, the £1.5million threshold was reduced when a company was a member of a 51% group. From April 2023 however, the threshold instead is now reduced when a company has “associated companies”, which is a much wider definition. The £1.5million threshold is divided by the number of associated companies a company has, plus your own company.
As an example, to show how this affects a company’s £1.5million threshold, if your company and three other companies are under the control of the same persons then your company will need to pay its corporation tax by instalments, if its annual taxable profit exceeds £375,000 (ie £1,500,000 divided by 4 companies).
A company is associated with another company if:
- One is under the control of the other; or
- Both are under the control of the same person or persons.
Control is usually defined by reference to ownership of share capital, voting power or assets on a windup. Some companies can be ignored, for example if they are completely dormant they are not counted as associated. However, the rules are complicated and professional advice is essential.
Paying in instalments
Companies that sit within the large company banding must pay their corporation tax electronically and in instalments. Typically, for accounting periods of 12 months, corporation tax will be paid in 4 quarterly instalments, 2 of which will be due before the end of your accounting period.
To calculate instalment payments, you will need to estimate your corporation tax liability for the period in question.
Late or underpaid instalment payments can incur interest charges from HMRC, penalties may also be charged if companies fail to make instalment payments or make instalment payments that are too small.
Exceptions
A company does not need to pay by quarterly instalments, even if it exceeds the profit threshold calculated above, if either :
- Its total tax liability for the accounting period is less than £10,000 (pro-rated if the accounting period is less than 12 months);
- Its profits for the accounting period are no more than £10million (reduced as above for associated companies) and either:
- It did not exist or did not have an accounting period at any time during the previous 12 months; or
- Its annual rate of profit was no more than £1.5million (reduced by associated companies), or its annual tax liability was no more than £10,000, for any accounting period which ended in the previous 12 months.
How M+A Partners can help
The use of the broader definition of “ associated companies” in the quarterly payment of corporation tax regime, increases the chance of companies being caught out and not realising that they now have to pay their corporation tax by instalments.
M+A Partners’ team of tax experts assist with determining your corporation tax position, advising companies if they fall within the remit of the quarterly instalment payment regime and helping to minimise any tax liabilities.
For any advice on this topic, please get in touch with your usual M+A Partners contact or contact me using the contact details below or email enquiries@mapartners.co.uk
