I don’t really understand Corporation Tax payment dates.  How important is it for the exam?

This area is examined at a “Details” level in both Paper 2: Business Taxation & Accounting Principles and also Paper 4: Corporate Taxation.

A “Details” level means you will be expected to know the detail of legislative provisions and be able to explain them to others.

It could and has been examined in the past as a Section I question and also as part of Section II question.

So really important.

Oh right.  I have my exam soon.  I certainly need to get a better understanding.  So when do companies have to pay Corporation Tax?

“Non large” companies pay Corporation Tax 9 months and 1 day from the end of their chargeable accounting period.  For example a “non large” company with a 31 March 2017 year end has a due date of 1 January 2018.

“Large” companies are rather more complicated and are required to pay their Corporation Tax by instalments.

What’s the difference between a “large” and “non large” company?

A “large” company has Augmented Profits that exceed £1.5m. This limit will be proportionately reduced where the chargeable accounting period is less than 12 months.   Remember a company can never have a chargeable accounting period of more than 12 months so this limit will never be proportionally increased. 

The £1.5m limit is also divided by the number of related 51% group companies at the end of the chargeable accounting period immediately before the chargeable accounting period in question.

What do you mean by Augmented Profits, I have never heard of that term before?

If you haven’t got much familiarity with Corporation Tax payment dates it makes sense you haven’t heard the term Augmented Profits before as it is a term only used when deciding Corporation Tax payment dates.  Augmented Profits are Taxable Total Profits plus exempt dividends received.

What is the difference between an exempt dividend and any other type of dividend?

Exempt dividends are dividends received from related 51% group companies.

What is a related 51% group company?  I am guessing it has to do with a company holding at least 51% of shares of another company?

51% is slight misnomer as there is no requirement for 51% but rather only greater than 50%.  Any partial % above 50% is greater than 50%.  

Also it is not just holding greater than 50% of the ordinary share capital but also greater than 50% of the profits available for distribution and an entitlement to greater than 50% of the assets available for distribution in the event of a winding up. 

What about companies joining or leaving a group during the year?  I know most of the clients I do work on are constantly changing their group structure.

A company is a related 51% group company for an accounting period even where it joins or leaves the group during the year. 

Ok that makes sense.  While I am thinking about possible scenarios, are overseas companies included?

The definition includes companies regardless of where they are resident.  So yes include overseas companies.

Oh wow.  It seems like this definition could include a lot of companies.  Can any companies be ignored?

Companies which would otherwise be a related 51% group company are ignored if they have been inactive throughout the whole of the chargeable accounting period.  In other words ignore dormant companies.

Some of the corporate clients I do work on are growing.  Does a company have to pay by instalments as soon as they become “large”?

Good point.  There is a potential grace period.

The first year that a company is “large”, it will remain paying tax 9 months and 1 day from the end of the chargeable accounting period, unless Augmented Profits exceed £10 million. 

The £10 million limit is divided among all the related 51% group companies and is also proportionally reduced for chargeable accounting periods which are less than 12 months long.

What about if a company has quite a low corporation tax liability but by virtue of being part of group with many companies the £1.5m Augmented Profits limit has been divided to such an extent that the company has to pay by instalments?  It seems like a lot of admin for a company to pay by instalments if the actual amounts are relatively small.

Good thinking.  The rules have thought about this scenario.

If a “large” company has a corporation tax liability of not more than £10,000 for a 12 month chargeable accounting period then it does not have to pay by instalments.  The £10,000 limit is proportionately reduced for chargeable accounting periods less than 12 months. 

Ok.  I think I understand when a company should be paying by instalments now.  But when exactly are these instalments due?

The first payment is due 6 months plus 13 days from the start of the chargeable accounting period.  Note this is from the start of the chargeable accounting period rather than the end.  I know you will be used to lots of other payment dates being due by reference to the end of the chargeable accounting period.  Note as well that you will sometimes see this written as the 14th day of the 7th month of the chargeable accounting period and this definition will get you to the exact same date.

Further payments are each due 3 months after the previous instalment.  The final payment is due 3 months plus 14 days from the end of the chargeable accounting period.

For a company with a 12 month chargeable accounting period it works quite nicely.  For example with a chargeable accounting period ending 31 December 2016 the first payment would be due 14 July 2016 (6 months and 13 days from the start of the chargeable accounting period).  

The second payment will be due 14 October 2016 (3 months after the first payment).  The third on the 14 January 2017 (3 months after the second payment).  The final payment is due 14 April 2017 (3 months and 14 days from the end of the chargeable accounting period).

Hang on.  You’re telling me some of the payments are due before the chargeable accounting period has even finished.  How will the company know what the liability will be when they don’t even know what the profits will be?

Good spot.  The amount of each instalment is based on the estimated corporation tax liability of the current chargeable accounting period.  This estimate will change as the chargeable accounting period unfolds and is finalised and tax payments will change as a result.

How do you calculate the amount that is due for each instalment?

For a 12 month period it works quite nicely with each instalment being ¼ of the estimated corporation tax liability.

Because it is a quarter of the estimated liability you might have heard these called QIPs.  Meaning Quarterly Instalment Payments. 

Ah that’s what QIPs means.  I have often wondered when I have heard that in the office.  I’ve noticed that you keep saying for a 12 month chargeable accounting period it works quite nicely.  I take it that it’s not so nice for a shorter chargeable accounting period?

It does require a bit more thought.  But mainly we just have to be familiar with the formula 3/n x estimated corporation tax liability.

With n being the number of months in the chargeable accounting period.

We use the 3/n formula to calculate how many instalments there will actually be.

For an 8 month accounting period the instalments due will be 3/8 ths, 3/8 ths and 2/8 ths, which gives only three instalments. For a 4 month period the instalments due will be 3/4 ths and 1/4 th, which only gives two instalments.

Great, thanks very much for your help.  I feel I have the knowledge now.  I just have to do some questions to fully get my head around it.

My pleasure.  Best of luck.