Most limited companies pay Corporation Tax 9 months and 1 day after their year end. However, larger companies must pay their Corporation Tax in quarterly instalments during the accounting period itself.
HMRC refers to this system as Quarterly Instalment Payments (QIPs). Under this system, companies estimate their annual tax liability and pay it in stages. Consequently, tax leaves the business much earlier than under the standard rules.
What Makes a Company “Large”?
HMRC classifies a company as large when its annual profits exceed £1.5 million but remain below £20 million.
However, this threshold rarely stands alone. If your company has associated companies, you must divide the £1.5 million limit by the total number of associated companies plus your own.
For example: If you have two associated companies, you divide £1.5 million by three. The revised threshold becomes £500,000. Profits above £500,000 now trigger quarterly instalments.
As a result, group structures often bring businesses into the instalment regime sooner than expected.
What Counts as an Associated Company?
A company counts as associated when either:
- One company controls another
- The same person or group controls both companies
Control usually links to share ownership or voting rights. Overseas companies can also qualify as associated. Therefore, location does not remove the obligation.
Directors should review ownership structures annually to confirm whether thresholds reduce.
Very Large Companies
HMRC classifies companies with profits above £20 million as “very large”. Associated companies also reduce this £20 million threshold. Consequently, some groups enter the very large regime earlier than anticipated.
Very large companies follow an accelerated timetable. They begin paying instalments two months and 14 days after the accounting period starts.
When Do Quarterly Corporation Tax Instalments Fall Due?
For a 12-month accounting period, large companies pay four equal instalments.
The standard schedule runs as follows:
- 6 months and 13 days after the start of the period
- 3 months after the first instalment
- 3 months after the second instalment
- 3 months after the third instalment
Importantly, the first two payments fall before the year end. Therefore, you must estimate profits before finalising accounts.
Short Accounting Periods
Shorter accounting periods require adjusted calculations.
If the period lasts three months or less, you make one single payment. If the period lasts longer than three months but less than 12 months, you divide the total liability by the number of months and multiply by three.
You pay that figure for each instalment except the last one. You then pay the remaining balance as the last instalment.
This method ensures a fair spread of payments across the shortened period.
First-Year Grace Period
If your company becomes large for the first time, you may qualify for a one-year grace period. During that first qualifying period, you normally follow the standard nine-month payment rule. However, this relief does not apply if profits exceed £10 million, adjusted for associated companies.
When Instalments Do Not Apply
Even when profits exceed the threshold, quarterly Corporation Tax instalments may not apply in certain situations.
This includes:
- Your total Corporation Tax liability falls below £10,000
- Your company did not trade during the previous 12 months
- Your prior year profits remained below the relevant threshold
In these cases, you pay the full amount by the normal due date.
How to Calculate Quarterly Corporation Tax
1. Estimate Total Liability
First, estimate your Corporation Tax for the full accounting period.
Include tax on:
- Trading profits
- Loans to directors in close companies
- Controlled foreign company changes
Next, deduct available reliefs and losses. The result gives your expected total liability.
2. Divide the Liability
For a 12-month period, divide the estimated liability into four equal parts. If you have a £400,000 estimated liability, each instalment should be £100,000.
You should base each payment on the best estimate available at that time.
3. Review and Adjust
Profits often change during the year. Therefore, you should update forecasts regularly.
If profits incomes, make a top-up payment promptly. Early action reduces interest exposure.
If profits fall, you may reduce future instalments. In some circumstances, you can claim a repayment.
Interest on Instalment Payments
HMRC charges interest on underpaid instalments from the original due date. HMRC refers to this as debit interest. Conversely, HMRC pays interest on overpayments. HMRC calls this credit interest.
However, the credit rate usually remains lower than the debit rate. Therefore, deliberate overpayment rarely benefits the business.
Penalties for Non-Compliance
HMRC may charge penalties if you deliberately:
- Fail to make instalment payments
- Submit instalments that you know fall too low
Additionally, HMRC automatically charges interest on late payments. Repeated non-compliance increases the likelihood of scrutiny and potential enquiries.
Group Payment Arrangements
Groups can simplify administration through a Group Payment Arrangement. Under this arrangement, one nominated company pays instalments on behalf of the group.
This approach centralises cash management and reduces administrative duplication. Furthermore, group companies may offset an overpayment by one entity against a liability of another.
Ring Fence Companies
Companies involved in UK oil-related ring fence activities follow additional rules. They pay Corporation Tax on non-ring fence profits under the normal instalment system. They also pay ring fence tax and supplementary charge in up to three instalments.
For a 12-month accounting period, ring fence payments fall due:
- 6 months and 13 days after the start
- 3 months later
- 14 days after the year end
Shorter periods require adjusted calculations. You must maintain a clear separation between ring fence and non-ring fence profits.
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This article is for general informational purposes only and does not constitute legal or financial advice. While we aim to keep our content up to date and accurate, UK tax laws and regulations are subject to change. Please speak to an accountant or tax professional for advice tailored to your individual circumstances. Pi Accountancy accepts no responsibility for any issues arising from reliance on the information provided.