HMRC have for many years deemed that where a company is ‘large’, corporation tax is due to be paid in quarterly instalments which commence halfway through the accounting year in question – which means companies have to estimate their tax due and make reasonable payments on account in order to avoid backdated interest charges.

In recent years the interest charged on any shortfalls has been just 1.5% per annum so it has not always been at the top of a business’s priority list in terms of cash flow.

What has changed?

Since April 2019, HMRC have now introduced a 'very large' regime, which means instalments for any companies falling into this category are due even earlier than in the 'large' regime.  

Furthermore, interest rates have steadily increased over the last 12 months and the current interest rate is 5% per annum - which is no longer an insignificant cost.

My company isn't 'large' so surely it won't apply to me?

The profits chargeable to corporation tax will determine whether you fall into the large or very large regime:

• Profits > £ 1.5m = large regime (if the second consecutive year of exceeding limits)
• Profits > £ 10m = large regime
• Profits > £ 20m = very large regime

BUT – these limits are divided equally between any associated companies, which is broadly speaking any companies where one can control the other – this includes non-UK companies but excludes any companies that are dormant for the whole accounting period.

From April 2023, it will also include any companies that are under ‘common control’ – which broadly means any companies that can be controlled by the same person/group of persons – which potentially means a lot more ‘associated companies’ for these purposes.

Example

ABC Limited has taxable profits of £ 2.2m for the year ended 31 December 2022, an increase of 50% from previous years.

Its corporation tax of £ 418,000 would be due for payment on 01 October 2023.

However, it has 9 subsidiaries, all of whom have fairly insignificant trading profits of less than £ 20k.

The threshold for being very large of £20m is divided by 10 (the total number of companies in the group), meaning each company has a limit of £ 2 m – which ABC Limited has exceeded.

ABC Limited is therefore within the very large regime and should have paid £ 104,500 (being 25% of the liability)  in March 2022, June 2022 , September 2022 and December 2022. It is irrelevant that the other companies in the group were under the threshold.

By the time we are made aware of this and able to advise you to make payment in say mid-February 2023 (something which you may not have the cash flow for, given that you weren’t expecting to pay until October 2023), interest of nearly £ 9000 will have already accrued, and will still be accruing at £57 per day!

It is almost impossible to accurately estimate the overall tax position during the year, but any payments made on account will of course reduce the interest charges once the final tax position is determined.

Predicting the future

As your accountants, we  endeavour to keep you abreast of changes and how they might affect you where we can, however in this case we may not have this information until we are provided with the information AFTER your year end – which in most cases is too late, and by which point interest has already been incurred.

If your company falls within the very large regime, all four instalments are due to be paid BEFORE the end of the accounting period in question, so any discussions we have with you after the year end would be too late.

It’s therefore important that we know where this applies as early as possible, so we can make plans to help mitigate the impact, which will allow you to plan your cash flow effectively.

Action to take

If you have any concerns about this based on your expected profits or the number of other companies you may control or hold shares in, please get in touch with your usual contact on 0121 693 5000 (Solihull Office), 01384 250202 (Halesowen Office) or 01675 466344 (Coleshill Office) so we can review whether you are likely to fall within these regimes.