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:
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:
A corporation is considered as an allied or associated company with another corporation if:
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’, if, greater than 50% of its ordinary stake capital is beneficially owned (directly or indirectly) by ‘X’. Let’s understand this with an example:
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:
For instance, instalment payment schedule for accounting period beginning 1-Jan-17 and ending 31-Dec-17 will be as follows:
|Payment||Due date of payment|
|Initial instalment payment||14-Jul-2017|
|Second instalment payment||14-Oct-2017|
|Third instalment payment (due post the closer of accounting period)||14-Jan-2018|
|Final instalment payment (due post the closer of accounting period)||14-Apr-2018|
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:
|Payment||Due date of payment|
|First instalment payment||14-Jul-2017|
|Second instalment payment due post the closures of the accounting period||14-Oct-2017|
|Final instalment payment||14-Dec-2017|
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.
|Corporation’s total liability||£900,000|
|Number of months in an accounting period||8|
|Corporation’s over-all liability ÷ number of months in an accounting period x 3||£900,000 ÷ 8 x 3 = £337,500|
|First instalment payment and second instalment payment||£337,500|
|Third instalment payment and final instalment payment||£900,000 - (2 × £337,500) = £225,000|
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:
Payment cannot be made electronically by using the following using:
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.