How much do you know about quarterly Corporation Tax payments?
Written by Michael Gough, Senior Accountant at Shenward, Leeds.
For small companies, corporation tax is payable by nine months and one day after the end of your accounting period. For example, if your company’s year-end is 31 December 2019, the corporation tax, if you are a small company, would be due by 1 October 2020.
You might not be aware but ‘large’ companies as defined by HMRC are required to make quarterly Corporation Tax payments. It is noteworthy that HMRC’s definition of a ‘large’ company is not the same as the definition set out in the Companies Act 2006.
Put simply, if you’re classed as a large company by HMRC – your company’s profits for an accounting period are expected to top £1.5 million a year – you must pay the tax due electronically and in four instalments.
Confused? Let’s explore.
HMRC characterise a large business as one with an annual profit of between £1.5 million and £20 million.
Under Corporation Tax self-assessment large companies must pay in quarterly instalments if they expect their annual profits to be above the £1.5 million threshold. This threshold is known as the Upper Relevant Maximum Amount (URMA) and the current rate of Corporation Tax is 19%.
Most companies won’t fall within the quarterly payment regime, but the directors of fast-growing businesses need to be aware of their obligations as their companies expand and profits rise.
There are exceptions, of course, and that is where taking specialist advice from your accountant is important – and can save you time and money. Tax rules can be complex, every business is unique, and it pays to have an expert on your side.
To help get you started, we’ve answered some of the most frequently asked questions regarding quarterly Corporation Tax.
What are the quarterly Corporation Tax exceptions for growing companies?
A company doesn’t have to pay by instalments for an accounting period even if profits go above £1.5 million if:
- The amount of its total liability for the accounting period is less than £10,000, or where the accounting period is less than 12 months;
- Its profits for the accounting period do not exceed £10 million and at any time in the previous 12 months it did not exist or did not have an accounting period; or for any accounting period in the previous 12 months either its annual rate of profit did not exceed £1.5 million or its annual rate of tax liability did not exceed £10,000.
How does having a group of companies apply to paying quarterly Corporation Tax?
Where a company owns at least 51% of other companies in a group the URMA is calculated by dividing £1.5 million by the number of companies in the group. This includes the parent company so if a company has another three in the group then the URMA is divided by four.
Group companies can choose to offset an amount overpaid by one company against an amount unpaid by another company in the group.
HMRC also offers Group Payment Arrangements, which allow groups to make instalment payments on a group-wide basis. You can nominate one company in the group to pay the instalments on behalf of the group, rather than company by company.
When do quarterly payments have to be made?
Four equal instalments should be paid for a 12-month accounting period, two within the 12 months and two afterwards.
The dates are:
- Six months and 13 days after the first day of the accounting period
- Three months after the first instalment
- Three months after the second instalment (14 days after the last day of the accounting period)
- Three months and 14 days after the last day of the accounting period.
For example, using the same example as earlier, a company with a year-end of 31 December 2019:
- 14 July 2020
- 14 October 2020
- 14 January 2021
- 14 April 2021
How are quarterly payments worked out?
A company must estimate its current tax year liability, taking into account net reliefs and set offs, and make payments based on that assessment. The estimate is just that, an estimate, and will vary over time.
Companies are allowed to top-up payments at any time. It may also be possible to claim back over-payments if they shouldn’t have been made or were shown to be excessive. Alternatively, HMRC will set any over-payment against future liabilities.
What should growing companies be aware of?
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. If for example, a company’s accounting period ending on 31 December 2019 is the first accounting period where profits exceed the URMA, it will be required to make payments on account for the accounting period 31 December 2020. Its tax payments will be as follows:
- First payment on account (2020): 14 July 2020
- Corporation tax liability (2019): 1 October 2020
- Second payment on account (2020): 14 October 2020
- Third payment on account (2020): 14 January 2021
- Fourth payment on account (2021): 14 April 2021
By 14 October 2020, the company will have paid its corporation tax liability for 2019 and potentially up to 50% of its upcoming tax liability for 2020. Therefore, it is absolutely essential that companies plan ahead when budgeting for cash flow.
How should payments be made?
All payments must be made electronically. This can be by direct debit, debit card, credit card, company credit card or your own bank or building society’s internet banking service.
Alternatively, you can use BACS direct credit, your own bank or building society’s telephone banking service, CHAPS or Bank Giro.
What are the penalties for failing to pay Corporation Tax?
HMRC may charge penalties if a company deliberately fails to pay quarterly instalments or doesn’t pay enough. The amount will vary. Interest can also be charged on overdue or under-paid instalments.
Tax can be complex so if you need help with Corporation Tax please speak to one of our experts here Shenward – your leading independent firm of accountants and business advisors. Email michael@shenward.com