Large companies in the UK are currently required to pay their corporation tax liability in instalments - typically quarterly, with the first payment due six and a half months after the start of the accounting period and the final instalment due three and a half months after the period end. Large companies, for this purpose, are broadly defined as those with taxable profits in excess of £1.5m, with that limit reduced to reflect the number of active 51 per cent associated group companies; so if there are five active companies in a worldwide corporate group, the threshold for instalment payments for each company subject to UK corporation tax is £300,000.
Accelerated instalment payments for very large companies
The Government has now gone one step further and introduced an accelerated quarterly instalment payment regime, for accounting periods commencing on or after 1 April 2019, for ‘very large companies’. The new regime requires very large companies (companies with taxable profits exceeding £20m) to pay their corporation tax instalments earlier, with the first payment typically due two and a half months after the start of the accounting period and the final payment due in the final month of the period.
The £20m profits threshold is again reduced to reflect the number of active worldwide 51 per cent associated companies in a group of companies. The £20m profits threshold may therefore appear, at a cursory glance, to put many companies out of reach of the new accelerated instalment payment regime, but even if there are only a small number of associated companies with very small or limited activities, this limit quickly drops, and could result in a significant cash flow impact for companies deemed to be very large companies. This will be particularly so in the first year of the new regime when payments will still be due for the previous accounting period under the large company regime.
Small companies may be very large companies
The mechanics of the regime mean that some relatively small operations in the UK that are part of a major multinational groups could very well be subject to the accelerated instalment payment regime. The same is true for companies in UK or overseas parented groups that may not consider themselves as ‘very large’, but that have a sufficiently significant number of associated entities. The cash flow impact on these businesses can be demonstrated with an example:
A UK company is the parent company of a group, has four associated companies and anticipates having taxable profits of £5m in both the year to 31 December 2019 and the year to 31 December 2020. As the number of associated companies means the profits threshold is reduced to £4m for periods commencing on or after 1 April 2019, the company is deemed as being very large for the purposes of the new instalment payment regime for its year to 31 December 2020. During the year ended 31 December 2019 the company will be required to make four instalment payments to HMRC, spread evenly across the year, on 14 January, 14 April, 14 July and 14 October (two in respect of the year to 31 December 2018 and two for the year to 31 December 2019). However, during the year ending 31 December 2020, it will need to make six instalment payments to HMRC (two, on 14 January and 14 April, under the large company regime for the year to 31 December 2019, and four, on 14 March, 14 June, 14 September and 14 December, under the new very large company regime for the year to 31 December 2020), with four out of the six payment dates falling in the first six months of the year.
Take action now
Those responsible for company tax payments, if they have not already done so, should make sure that they understand the potential cash flow impact that this will have on their businesses and plan and budget appropriately.
For more information please get in touch with Suze McDonald.