Can I Pay Corporation Tax in Instalments?

If profits of a company, in the United Kingdom, for an accounting time-period are at a yearly rate of greater than £1.5mn, then the business must typically pay Corporation Tax by electronic means in instalments. In general, ‘large’ businesses in the United Kingdom must pay Corporation Tax by electronic means in instalments. A large business is defined as one where earnings, for an accounting period, are at a twelve-monthly rate which is greater than the ‘upper limit’ – presently £1.5mn. However, there are certain exemptions. A corporation is not required to pay in instalments for a specific accounting period, even if its earnings surpass the upper limit, if either:

• For an accounting period, the amount of its over-all liability is below £10,000 or where the period is below 12 months, less than a twelve-monthly rate of £10,000
• For an accounting period, the business earnings do not surpass £10 mn and either one of the below mentioned apply:
  • At any time all through the preceding 12 months, the business did not exist or did not have an accounting period
  • For any accounting period which ended in the preceding 12 months, either its annual rate of tax liability did not surpass £10,000 or its annual rate of earnings did not surpass the upper limit

If either of the above mentioned situations are true for a business, then the business will be required to pay the entire tax in full by the standard payment due date.

If business has associated or allied companies for an accounting period ending prior 1-Apr-2015, the £1.5 mn and £10 mn limits are decreased by dividing the yearly rates by the number of allied companies plus one. The new figure arrived will be the yearly threshold for the business. Let’s understand this with an example:

• Consider a corporation has 5 allied companies. If the earnings for a 12-month accounting period ending 30-Nov-2010 is £300,000 and Corporation Tax obligation is £55,000 then:
  • £1.5 mn divided by 6 (5 allied companies + 1) = £250,000
• Here, the corporation is a large establishment and even though its earnings are below £1.5 mn, they surpass the annual threshold of £250,000 and hence, the tax obligation is in excess of £10,000.

A corporation is considered as an allied or associated company with another corporation if:

• One corporation is under the control of the corporation.
• If both the corporations are controlled or managed by the same individual or individuals. Here, control is defined with reference to rights to share capital, or power to vote.

Accounting periods ending on or post 1-Apr-2015

For an accounting period ending on or post 1-Apr-15, the associated corporation rules have been substituted by a 51% group test. If a corporation has associated 51% group companies, the £1.5 mn and £10 mn thresholds are decreased by dividing the yearly rates by sum of related 51% group companies plus one. The new arrived number is the yearly threshold for the corporation. Company Y is an associated 51% group business of company X if:

• Y is a 51% subsidiary of X
• X is a 51% subsidiary of Y
• Y and X are 51% subsidiaries of similar company

‘Y’ is a 51% subsidiary of ‘X’, if, greater than 50% of its ordinary stake capital is beneficially owned (directly or indirectly) by ‘X’. Let’s understand this with an example:

• Suppose a corporation has 4 associated 51% group companies. The earnings for a 12-month accounting period, closing 30-Apr-2016, are £400,000 and the Corporation Tax obligation of the business is £80,000.
  • The annual accustomed threshold is: £1.5 mn divided by 5 (i.e., 4 + 1) = £300,000.
• Although the earnings are less than £1.5 mn for the accounting period, however, the earnings are more than the adjusted yearly threshold of £300,000. Since, the tax liability also surpasses £10,000, the corporation is considered as a large corporation for the specific accounting period.

How to pay Instalments

The length of the accounting period determines the dates when the business has to pay instalments for Corporation Tax. For an accounting period of 12 months, a business will usually pay Corporation Tax in 4 three-monthly instalments, 2 of which will be due prior to the end of an accounting period. If a corporation has a 12 month accounting period, the instalment payment schedule will be as follows:

• 6 months and 13 days post the initial day of the accounting period
• 3 months post the initial instalment
• 3 months post the second instalment (14 days post accounting period’s last day)
• 3 months and 14 days post the accounting period’s last day

For instance, instalment payment schedule for accounting period beginning 1-Jan-17 and ending 31-Dec-17 will be as follows:

However, if a corporation has an accounting period of less than 12 months, then in such a scenario the final instalment will be payable 3 months and 14 days post the closures of the accounting period. Furthermore, if an accounting period is lengthier than 3 months, the initial payment will be payable 6 months and 13 days post the initial day of the accounting period. For instance, instalment payment schedule for an accounting period beginning 1-Jan-17 and ending 31-Aug-17 will be as follows:

Computing Instalment Payments

Step 1: Estimate the total liability of a company

To compute an instalment payment, a business must guesstimate the Corporation Tax obligation for the accounting period, comprising any tax payable on: loans to directors and additional contenders in ‘close’ corporations, and controlled foreign companies (CFC). Then subtract all aids and set-offs to attain a company’s over-all liability – this is similar to what a business would do while computing a Corporation Tax payable on a tax return. This amount is used to compute the instalment payments.

Step 2: Estimate the amount of each instalment

For an accounting period of 12 month, a business can pay the entire obligation in 4 equivalent portions, each portion amounts to a quarter of company’s entire liability. For a 3 months accounting periods, 1 single payment can be made for a company’s total liability. For an accounting periods lengthier than 3 months but lesser than 12, all payments except the final will be the corporation’s entire liability divided by the number of months in the accounting period multiplied by 3. The final instalment will be the company’s total liability minus the amount paid so far.

Computing instalment payments for a corporation with an accounting period 1-Jan-2017 to 31-Aug-2017 and payable Corporation Tax equivalent to £900,000.

Making an Instalment payment

Business must make Corporation Tax payments and related payments electronically. Related payments comprise penalties for not filing Company Tax Return on time and interest charged on unpaid Corporation Tax. Business can make payment for instalments electronically using:

• Direct Debit
• Credit card or debit card – beginning 13-Jan-18, individuals will not be able to pay with their personal credit card
• Own bank or building society’s online banking service

Payment cannot be made electronically by using the following using:

• Bankers' Automated Clearing Services (BACS) Direct Credit
• Building society’s telephone banking service
• Clearing House Automated Payment System (CHAPS)
• Bank Giro
• Contributing Post Offices – businesses will not be able to pay at the Post Office beginning 15-Dec-2017

Interest and Instalment payments

HMRC will charge interest on paying the instalments late or on underpaid instalments. This interest amount is referred to as debit interest by HMRC, to discriminate it from interest on standard late payments. This interest is only computed and applied when an individual submits a Company Tax Return.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.