From 1 April 2023, standalone companies with profits exceeding £250,000 are now subject to a Corporation Tax main rate of 25%. Companies with profits below £50,000 continue to be taxed at 19%. Companies with profits of between £50,000 and £250,000 are taxed at the 25% rate but will be entitled to marginal relief.

For groups of companies or companies under common control, the profit thresholds need to be reduced proportionately to determine the rate of tax payable by each company.

These rules also determine whether a company is large or very large for quarterly instalment payment purposes.

Prior to 1 April 2023, the thresholds were divided by the number of companies owned within the same corporate group. The related 51% group company test has now been replaced by associated company rules, significantly widening the scope.

In broad terms, a company is an associated company of another company if one has control of the other, or both are under the control of the same person or persons. This includes non-UK resident companies but excludes the following:

• dormant companies;
• passive holding companies (with no activity other than receiving and distribution of dividends); and
• companies owned by associates of that person (or persons), providing the relationship between those companies is not one of ‘substantial commercial interdependence’.

Control of a company is determined by the shares held by a person as well as their associates. An associate would include the individual’s spouse or civil partner, lineal descendants, ancestors and siblings.

Quarterly instalment payments regime

Companies need to consider whether they are classed as large or very large for the quarterly instalments payment regime. Quarterly instalments are paid during the year based on an estimate of the current year tax.

Large companies

Large companies must pay their corporation tax by quarterly instalments. A company is large if its profits for the accounting period divided by the number of associated companies at the end of the last accounting period exceed the upper limit in force at the end of that accounting period. The upper limit is £1.5 million. If a company has taxable profits in an accounting period which exceed £20 million, it will be considered very large and separate rules apply (see below).

A company will normally have a grace period for the first year it is deemed to be large unless its taxable profits for that year exceed £10 million divided by the number of associated companies, again at the end of the last accounting period. If the period of grace applies, it will only fall within the quarterly instalment payments regime from the second year it is large.

Very large companies

Accelerated instalment payments will apply to very large companies where taxable profits exceed £20 million, divided by the number of associated companies at the end of the last period.  Unlike large companies, there is no year of grace provisions for companies moving into the very large payment regime. It is therefore critical that companies who may exceed this threshold consider the need to make payments early in the financial year.

The new associated companies rules mean many more companies are within the quarterly instalments regime.

Quarterly payments timetable

A large company with a 12-month accounting period will pay tax in four equal instalments, in months 7, 10, 13 and 16 following the start of the accounting period.

Companies in the large companies quarterly instalment regime for the first time from 1 April 2023 (assuming a 31 March year-end) will need to make their first instalment payment by 14 October 2023 (being six months and 13 days from the start of the notional tax period commencing 1 April 2023).

For very large companies with a 12-month accounting period, quarterly instalment payments are due on the 14th day of the third, sixth, ninth and twelfth months of the accounting period.

Those companies within the very large company instalment regime should have made their first instalment payment by 14 June 2023 (being two months and 13 days from the start of the notional tax period starting 1 April 2023).

Beware of interest and penalties!

If companies don’t pay their quarterly instalments on time or underpay, HMRC will charge interest on all late or underpaid instalments. Interest is calculated and charged when a company has filed its company tax return, or HMRC have made a determination of its corporation tax liability and the due date has passed.

With the current high HMRC interest rate this means it can get very expensive for companies not making payments on time.

A penalty may be charged if a company deliberately fails to make instalment payments or makes instalment payments of insufficient size.

The new Corporation Tax rates, quarterly installment payment regime and associated tax rules are a complex area and require careful consideration to ensure compliance; if you require support and advice, please contact us.

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