Corporation Tax – Quarterly Instalment Payments

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There are certain circumstances in which a company will be required to pay corporation tax in quarterly instalments. Quarterly instalment payments (“QIPs”) do not apply to partnerships, but the expected profitability of an LLP may have significant impact on the position of its corporate member.

Background

The normal due date for payment of corporation tax is 9 months and 1 day after the end of the accounting period. However, for accounting periods ending on or after 1 July 1999, companies which pay tax at the full corporation tax rate are generally required to pay by instalments.

What is the key issue?

When a company first begins to trade or comes within the charge to corporation tax it must be able to determine within the first 6 months of trading whether its profits for the first accounting period will exceed the limits which bring it within the QIP regime. The position needs to be continuously monitored throughout the life of the company in order to mitigate exposure to unforeseen interest and penalties.

Where a company falls within the QIP regime, the company will need to:

  • Be aware that the instalment payment is due, and
  • Be able to estimate its corporation tax liability for the accounting period which may be yet to end.

When will a company have to pay corporation tax by instalments?

The instalment payment rules only apply to large companies.

Currently, a company is large where profits in any accounting period exceed a limit of £1,500,000. Companies will be subject to QIPs in the year following that in which this threshold is first exceeded, unless it exceeds the higher threshold (see below) in which case QIPs will be due sooner.

The £1,500,000 limit must be divided by the number of associated companies plus 1, and proportionately reduced for accounting periods of less than 12 months. Therefore, a company with a short accounting period or a large number of associates may fall within the rules with much lower profits.

The definition of an associated company is complex and care is needed, especially when companies are privately owned and major shareholders have other business interests in the UK or overseas.

A large company will not have to pay corporation tax by instalments for an accounting period if it was not large in the 12 month period preceding the accounting period and its profits for the accounting period do not exceed £10,000,000.

The £10,000,000 threshold is reduced by the number of associated companies plus 1, and proportionately reduced for accounting periods of less than 12 months. A large company will not have to pay corporation tax by instalments if its net tax liability is less than £10,000.

When are instalment payments due?

Generally, for a company with a 12 month accounting period, corporation tax will be payable in 4 equal instalments. For example a company with a 12 month accounting period ending 31 December 2010 instalments will be due as follows:

  • 6 months and 13 days from the start of the accounting period (14 July 2010).
  • 3 months after (1) above (14 October 2010).
  • 3 months after (2) above (14 January 2011).
  • Final payment due 3 months and 14 days after the end of the accounting period (14 April 2011).

Payment dates are altered for shorter accounting periods and groups of companies containing large companies are able to pay corporation tax on a group-wide basis.

How are instalment payments calculated?

A company must estimate its profits for the relevant accounting period and the related corporation tax liability (net of reliefs and set-offs) and make instalment payments based on their estimates.

If the estimate of the corporation tax liability changes, QIPs are revised and there is some flexibility to adjust payments within the instalment payment period where under/over payments have been made. Interest is payable and receivable on differences between estimated and actual liabilities.

Penalties will apply if a company carelessly or deliberately fails to make, or makes deficient, instalment payments. In order to mitigate exposure to penalties it is prudent to document estimates and the commercial factors influencing them. 


 
17 March 2010



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Throgmorton is one of the leading companies specialising in the provision of financial and administrative outsourcing in the UK SME financial services sector.

The information in this notice is intended for general guidance only. Throgmorton does not accept any responsibility for losses incurred to any person acting or refraining to act as a result of the information in this notice. Advice should be taken in the context of specific circumstances.