We all know by now that the Spring budget held some unexpected surprises for companies, the biggest being the main rate of corporation tax increasing from 19% to 25% from 1 April 2023. Alongside that, the small profits rate and marginal relief legislation – which was repealed in 2015 – was re-enacted almost unchanged.
But one thing that may not have been immediately obvious was the changes to the quarterly instalment payments (QIPs) rules.
With most businesses financial forecasting for the next, say, 2- 5 years, companies should now factor changes in the timing of corporation tax payments, where the new rules apply, into their plans.
What are the current rules?
A company that is deemed ‘large’ or ‘very large’ is required to pay their corporation tax liability in quarterly instalments (in contrast, other companies are generally required to pay their corporation tax liability 9 months and 1 day after the company’s period end). The deadlines for QIPs payments are slightly different depending on whether the company is large or very large.
Large companies: Typically (although this will be different for shorter accounting periods (AP), for large companies the deadline for the first QIP will be 6 months and 14 days after the start of the chargeable period and then every 3 months, meaning the last QIP is due 3 months and 14 days after the end of the chargeable period.
Very large companies: the first QIP is due 2 months and 13 days after the start of the chargeable period then every 3 months until the final QIP, which is due 11 months and 13 days after the start of the chargeable period (but how can they pay tax before the end of the AP? – in a nutshell: all payments are based on the estimated total corporation tax liability for the AP).
What makes a company large or very large?
A company is deemed to be large where its augmented profits are more than £1.5m (pro-rated if shorter AP). This £1.5m limit is also divided by the total number of group companies. For reference, augmented profits for these purposes are profits chargeable to corporation tax plus dividends received from UK companies, but excluding group companies. There is a one year period of grace: a company will be subject to QIPS in the year following that in which it first exceeds the £1.5m threshold, unless its profits exceed £10m (this £10m limit is also divided by the total number of group companies).
For very large companies, the augmented profits are to be more than £20m (again pro-rated for shorter AP). This £20m limit is also divided by the total number of group companies. Companies exceeding this threshold will be subject to QIPs in the year the threshold is first exceeded – which means careful planning is required at the outset of the AP.
However, as only one threshold is available per group, it must be divided by the number of companies within the group. This can mean that companies with relatively modest profits can be subject to QIPS where they are part of a large group.
Currently, a group for QIPS purposes is a company and its “51% related group companies”. This includes the following situations:
- Company A is a 51% subsidiary or Company B;
- Company B is a 51% subsidiary of Company A; and
- Company A and Company B are both subsidiaries of the same company.
- A company is deemed a 51% subsidiary where more than 50% of the ordinary share capital is owned directly or indirectly.
This is where the changes come in…
New rules for associated companies
As included in the Finance Act 2021, from 1 April 2023, a group for QIPS purposes will no longer be a company and its 51% related group companies, but instead its 51% associated companies. This one small word change can have a huge impact on the timing of tax payments. These rules were in legislation before they were repealed in 1 April 2015, so may not be entirely new to everyone.
A company will be associated with another (including overseas companies) where:
- One of them has control of the other; or
- Both are under the control of the same person or persons.
Control for these purposes means having the greater part (i.e. 51% and over) of the share capital, voting power and/ or distribution rights.
Say, for example, Mr X owns 100% of the share capital of 5 unrelated companies. Under the current rules, the QIPs threshold would be £1.5m per company as they are unrelated for these purposes. However, when the rules change from 1 April 2023, these companies will be related as they are under common control and the QIPs threshold will be pro-rated amongst them. This means that the QIPs threshold falls from £1.5m per company to only £300k per company.
Not only this, there may be cases where companies that were not previously included in a group are now related for QIPs purposes. For example, under the current rules, a company limited by guarantee could never be part of a group on the basis that there is no ordinary share capital. However, fast forward to 1 April 2023, it might just find itself part of a QIPs group by way of voting power.
Avoid nasty surprises and check your position now
Consideration of these rules should form part of a company’s tax planning activities, and be done well in advance of 1 April 2023. Although there are some cases where companies will be exempt from paying corporation tax via QIPs, we would strongly recommend that you seek advice on this.
If you have any queries, please contact us.