When do companies pay their tax liabilities?  You’d think this was a simple question but as is often the case it is not!

The UK has had two different payment regimes now for some time depending on whether a company was ‘Large’ or not but for periods beginning on or after 1 April 2019 we now have a third regime for ‘Very Large’ companies.

Why is this important?

  • If payment deadlines are missed HMRC will charge interest and have the ability to charge penalties
  • The introduction of the ‘Very Large’ regime brings further complications and cash flow considerations 

So what are the rules?

Here we set out the basis rules some points to watch out for.  If in doubt seek advice.

UK ‘payment’ rules:  

The UK now has three regimes all based on ‘size’.  When tax is payable is determined by which one the company falls into:  

  • The ‘Large company’ regime
  • The ‘Very Large company’ regime (for periods beginning on or after 1 April 2019)
  • The ‘normal due date’ = everyone else

So how to determine which one applies?

The ‘size’ of the company for this purpose is largely determined by its taxable profits.  

Large companies

Broadly a company is Large its tax liability is greater than £10,000 and either:

  • its taxable profits exceed £1.5 million in 2 consecutive accounting periods OR
  • its taxable profits exceed £10 million in the current accounting period

Very large companies

Broadly a company is Very Large if its profits exceed £20 million in the current accounting period.

NOTE – These limits are reduced if a company is part of a group as they are divided by the number of worldwide associated companies at the start of the accounting period.  Therefore it is important to be able to identify the relevant number of group companies.  Companies with reasonably small taxable profits could be ‘Large’ or ‘Very Large’ if they are part of large groups or the group size is not known.

When are payments due and how much should you pay? 

Companies not falling into the ‘Large’ or ‘Very Large’ regimes pay their tax on the normal due date which is 9 months and 1 day after the end of the accounting period.

Companies falling within the ‘Large’ and ‘Very Large’ regime are required to pay their corporate tax in 4 quarterly instalments starting in advance of the accounting year end.    

When looking at a 12 month accounting period Large entities are required to pay their first tax instalment payment 6 months and 13 days after the start of the accounting periods, followed by 3 more instalments at intervals of 3 months afterwards. 

For Very Large entities the first payment is required 3 months and 13 days after the start of the accounting periods followed by 3 more instalments at intervals of 3 months afterwards.

As the final tax position is not known the companies are required to estimate their tax position.  Each instalment payment may equate to 25% of the total estimated tax for the year or there may be some adjustments required when calculating later instalments if the estimated total tax goes up or reduces

Note – As the ‘Very Large’ rules are just kicking in for the transitional year companies falling into these rules will find an overlapping of instalments for two accounting periods.  This could have an impact on cash flow if not planned.    

To illustrate this for companies falling into the ‘Very Large’ regime,  using the years ending 31 December 2019 and 31 December 2020 and a total tax liability for both years of £2 million payments would be required as follows:

Date Period to 31 Dec 2019 Period to 31 Dec 2020
14 Jan 2020 3rd Instalment (£500k (being 25% of £2million )  
14 March 2020   1st Instalment (£500k)
14 April 2020 4th Instalment (£500k)  
14 June 2020   2nd Instalment (£500k)
14 Sep 2020   3rd Instalment (£500k)
14 Dec 2020   4th Instalment (£500k)

What can be done?

There may be little that can done to ensure that a company does not fall into the instalment regimes however companies can minimise the interest cost for underpaying instalments by:

  • ensuring accurate group company numbers are available
  • having as up to date information as possible at each instalment date
  • preparing and reviewing tax estimates at each instalment date
  • building the payments into their cash flows
  • seeking advice if not sure how the rules apply

For more information around the new UK tax payment rules for very large companies, please contact Lucy Mangan below or your local Menzies contact.

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