More companies to pay corporation tax under the quarterly instalment payments regime?

A change to one of the key metrics for determining if a company is within the scope of the corporation tax quarterly instalment payments (QIPs) regime, for either large companies or very large companies, will be introduced with effect for accounting periods beginning on or after 1 April 2023. The ‘related 51% group companies’ test will be replaced by one based on the number of the taxpayer company’s ‘associated companies’.

Revised definitions

The definition of associated company is much broader than that of a related 51% group company, as one company is an associated company of another if one of the two has control of the other, or both companies are controlled by the same person or persons (ie there is no requirement for a corporate group to exist). ‘Control’ is also a widely defined term for these purposes, referring to control over the affairs of a company, in particular through holding voting power or share capital, or entitlement to the income and/or assets of the company on a distribution.  

Practical consequences

Whilst it may also affect other companies under direct ownership of the same investor, it is expected that the practical impact of this change will be felt, in particular, by many companies controlled by private equity investment funds, as there may be other portfolio companies under common control, which would be brought into the count of associated companies, thereby materially reducing the thresholds above which QIPs apply.

This ‘new’ legislation (which is actually almost identical to rules that applied prior to the introduction of the related 51% group companies’ concept in 2015) does include a relaxation for businesses that are not ‘substantially commercially interdependent’. However, this relaxation is narrowly targeted and, whilst it may help to prevent corporate investors in a private equity fund from being associated with the portfolio companies in some circumstances, it is not thought to prevent portfolio companies from being associated with each other generally.

What are the implications for taxpayers?

There are likely to be a significant number of private equity-owned companies that now fall within a QIPs regime for the first time, or move into the very large company QIPs regime. Both situations will accelerate the due dates on which a company’s corporation tax liabilities should be paid. As an example, a company with a 31 March 2024 year end that is brought within the scope of the very large companies QIP regime as a result of this change will be required to pay its first instalment of corporation tax for that year as early as 14 June 2023.

To determine the precise number of associated companies for an accounting period for a particular private equity-controlled company, a clear understanding of the wider portfolio held by the private equity firm  and the structure of the fund at the end of the company’s preceding accounting period will therefore be required. This will include determining if the control test is met in relation to each portfolio company, and assessing the impact of the carve out for entities that are not substantially commercially interdependent.

Collating the necessary details required to conclude on this is likely to be a significant undertaking, and the analysis would need to be updated on a regular basis, as companies join and leave the portfolio. However, companies will need to form a view on their number of associated companies to ensure that they can forecast and manage future cash outflows and minimise any liabilities to interest on late paid corporation tax.

For many private equity-controlled companies, a pragmatic approach may therefore be to simply assume the associated companies test will result in the company being within the scope of the very large QIPs regime. Whilst this approach will be good news for the Exchequer, accelerating its tax receipts, it is unfortunate that the government has introduced a regime that appears to prejudice private equity portfolio companies, many of which will lack the specialist in-house tax resources of those that the very large company QIPs regime was initially targeted at.

What should companies be doing now?

Companies, especially those with private equity investment, should review the potential application of the associated companies’ rules, to ascertain whether they may be brought within a QIPs regime. This will be important not only for the purposes of cashflow management, but also to ensure a robust filing position is taken for corporation tax return purposes that can be supported during the due diligence process ahead of a future exit event.

For more information, please get in touch with Suze McDonald, Andrew Gordon or your usual RSM contact.