Corporate
and business tax
Quarterly
Instalment Payments
Under
corporation tax self assessment large companies are required
to pay their corporation tax in four quarterly instalment
payments. These payments are based on the company’s estimate
of its current year tax liability.
Note that the overwhelming majority of companies are not within
the quarterly payment regime and continue to pay their corporation
tax nine months and one day after the end of their accounting
period.
We highlight below the main areas to consider if your company
is affected by the quarterly instalments system.
Companies
Affected by Quarterly Instalment Payments
Large
companies
Only large companies have to pay their corporation tax by
quarterly instalments. A company is large if its profits for
the accounting period exceed the upper relevant maximum amount
(URMA) in force at the end of that period and it therefore
pays its tax at the main rate. URMA is currently £1.5
million, and the main rate of corporation tax is set at 30%
until 31 March 2006.
Associated companies
Where a company has associated companies, URMA is reduced
to the figure found by dividing that amount by one plus the
number of associates. URMA is also proportionately reduced
for short accounting periods.
A company is associated with another company if one is under
the control of the other, or if both are under the control
of the same person or persons. Control is, broadly, defined
by reference to ownership of share capital or voting power.
So, if a company has three associates, URMA is £375,000.
Any of the companies that have taxable profits exceeding that
figure will be subject to the instalment payments regime.
Those which do not exceed that figure will not be subject
to the regime.
Growing companies
A company does not have to pay its corporation tax by instalments
in an accounting period 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.
This gives companies time to prepare for paying by instalments
(but see below).
The
Pattern of Quarterly Instalment Payments
From
2002, 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 actual
due date of payment is six months and 13 days after the start
of the accounting period, then nine months and 13 days, and
so on. 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.
Pattern of payments for a growing company
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 2004
and is expected to be large in 2005. Its tax payments
will be as follows:
- for
the 2004 accounting period, the tax liability is payable
on 1 October 2005
- for
the 2005 accounting period, 25% of its tax for 2005
in each of July and October 2005 and January and April
2006.
As
can be seen, the first instalment for 2005 is payable
before the tax liability for 2004. It is therefore essential
that budgets are prepared of expected profits 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.
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Working
Out Quarterly Instalment Payments
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 seven, a
company has to estimate profits for the remaining part of
the accounting period.
In particular note that tax due under the loans to participators
legislation is also included.
A company’s estimate of its tax liability will vary over
time. 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 have 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
Interest is calculated only once a company has filed its tax
return, or the Revenue has made a determination of its corporation
tax liability and the normal due date has passed.
The payments the company makes are compared to the amounts
that ought to have been paid throughout the instalment period.
If a company has paid too much for a period compared to the
amount of corporation tax that was due to have been paid,
it will be paid interest. If it has paid too little, it will
be charged interest.
Rates of interest
Special rates of interest apply for the period from the due
and payable date for the first instalment to the normal due
and payable date for corporation tax (nine months and one
day from the end of the accounting period).
Thereafter, the interest rates change to rates in line with
those which already apply for accounting periods before self
assessment for companies. 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.
Special arrangements for groups
There is a group accounting 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.
How
We Can Help
If
you think your company may be affected by the quarterly instalment
regime, procedures will need to be set in place to estimate
the liability.
We will be more than happy to provide you with assistance
or any additional information required.
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For information of users: This material is published
for the information of clients. It provides only an overview
of the regulations in force at the date of publication, and
no action should be taken without consulting the detailed
legislation or seeking professional advice. Therefore no responsibility
for loss occasioned by any person acting or refraining from
action as a result of the material can be accepted by the
authors or the firm.
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