Corporation Tax - Quarterly Instalment Payments

A company does not have to pay its corporation tax by instalments if:

its taxable profits for that accounting period do not exceed £10 million and

it was not large for the previous year.

Where there are associated companies, the £10 million threshold is divided by one plus the number of associates at the end of the preceding accounting period. The threshold is also proportionately reduced for short accounting periods.

The effect of this exemption is that growing companies will not be instalment payers in the first accounting period in which they are large, unless the growth is substantial. It therefore gives them time to prepare for paying by instalments (but see below).

A large company with a 12 month accounting period will pay tax in four equal instalments, in months 7, 10, 13 and 16 following the start of the accounting period. The first instalment payment is due six months and 13 days after the start of the accounting period, then each three months until the final instalment payment which is due three months and 14 days after the end of the accounting period. So, for a company with a 12 month accounting period starting on 1 January, quarterly instalment payments are due on 14 July, 14 October, 14 January next and 14 April next.

There are special rules where an accounting period lasts less than 12 months.

If a growing company is defined as a large company for two consecutive years, the quarterly instalments payments regime will apply for the second of those years.

The transition from small to large is best illustrated by an example.

A company with a 31 December year end was large in 2021 for the first time (and had profits below the £10 million threshold) and is expected to be large in 2022. Its tax payments will be as follows:

for the 2021 accounting period, the tax liability is payable nine months and one day after the end of the accounting period, i.e. on 1 October 2022.

for the 2022 accounting period, 25% of its expected tax liability is due on each of 14 July 2022, 14 October 2022, 14 January 2023 and 14 April 2023.

As can be seen, the first instalment for 2022 is payable before the tax liability for 2021. It is therefore essential that budgets of expected taxable profits are prepared whenever a company becomes large in order to determine:

whether the company will be large in the second year, and if so

what tax payments will have to be made in month seven of the second year.

For accounting periods beginning on or after 1 April 2019, ‘very large’ companies are required to pay corporation tax by instalments four months earlier than large companies. A company is a “very large” company if its taxable profits for an accounting profit are more than £20 million. Similar to large companies, this threshold is reduced proportionately if the accounting period is less than 12 months, and where the company has one or more associated companies. The same corporation tax liability threshold test applies as with large companies, whereby if a company’s corporation tax liability is less than £10,000, the company is not considered ‘very large’ and does not need to pay corporation tax in instalments.

For very large companies with a 12 month accounting period, quarterly instalment payments are due on the 14th day of the third, sixth, ninth and twelfth months of the accounting period.

A company has to estimate its current year tax liability (net of all reliefs and set offs) and then make instalment payments based on that estimate. This means that by month three for very large companies and by month seven for large companies, a company has to estimate profits for the remaining part of the accounting period.

A company’s estimate of its tax liability will likely vary over time, particularly as an accounting period progresses, and each instalment payment should be calculated on the revised estimate. The system of instalment payments allows a company to make top-up payments – at any time – if it realises that the instalment payments it has made are inadequate. A company will normally be able to claim back all or part of any instalment payments already made if later it concludes that they ought not to have been made, or were excessive.

Interest and penalties

HMRC charges interest on late or underpaid instalments. Interest is calculated and charged only once a company has filed its company tax return, or HMRC have made a determination of its corporation tax liability and the normal due date has passed.

HMRC will pay a company interest on instalment payments that turn out to be unnecessary, payments made early or overpayments. This interest is calculated and charged retrospectively once the liability for an accounting period is established, which is normally when the tax return is submitted.

Special rates of interest apply for the period from the due and payable date for the first instalment to the normal due date for corporation tax (nine months and one day from the end of the accounting period).

Thereafter, the interest rates change to the normal interest rates for under and overpaid taxes. This two-tier system takes into account the fact that companies will be making their instalment payments based on estimated figures but, by the time of the normal due date, should be fairly certain about their liability.

Interest received by companies is chargeable to tax, and interest paid by companies is deductible for tax purposes.

Penalties

A penalty may be charged if a company deliberately fails to make instalment payments, or makes instalment payments of insufficient size.

There is a group payment arrangement facility which allows groups to make instalment payments on a group-wide basis, rather than company by company. This should help to minimise their exposure to interest.