New Corporation Tax rules: why QIPs may apply
Tax Talk - March 2022
Next year’s increase in CT rates may affect the way your company pays its tax bills. That depends on size. We help you plan early for the changes that could affect your cash flow.
Readers will be aware of the forthcoming rise in CT rates, from 1 April 2023, from 19% to 25%. This includes the introduction of the small profits rate (SPR) and Marginal Relief calculations. (For more details on the upcoming changes to CT, see our June 2021 Tax Talk article: A welcome marginal change in corporation tax).
But it’s easy to overlook the effect the new legislation may have on quarterly instalment payments (QIPs) and cash flow for associated companies.
As the new rules come in next year, it will be important for companies to begin factoring them into their financial forecasting and cash flow – if they haven’t already done so.
QIPs – current rules
Most companies must pay their CT bill within nine months and one day of the end of the relevant accounting period. But where a company is deemed to be ‘large’ or ‘very large’, it must pay the tax in four quarterly instalments. The deadlines for QIPs for ‘very large’ companies differ from ‘large’ companies, as we explain below.
Whether a company is deemed to be large or very large depends on thresholds provided by legislation. These relate to a company’s ‘augmented profits’. Here, augmented profits refer to a company’s total taxable profits for the period, including dividends received by UK companies (excluding group companies).
A company is considered large if its augmented profits in an annual accounting period exceed £1.5m (pro-rated for shorter accounting periods).
The deadlines for payments for large companies under the QIPs regime are as follows:
- first payment due six months and 14 days after the start of the relevant accounting period
- remaining three payments due at three-monthly intervals, with the last one due three months and 14 days after the end of that accounting period.
An exclusion applies for a company for the first accounting period in which it qualifies as a large company (that is, with profits over £1.5m). That means payment can be made at the normal due date. There are additional conditions which need to be considered if the profits exceed £10m.
But in the following accounting period (if the £1.5m threshold is breached), the company will need to make payments to HMRC via QIPs.
The £1.5m and £10m limits are pro-rated for accounting periods shorter than 12 months and reduced by the number of 51% related group companies plus one.
Very large companies
Companies are deemed to be very large if augmented profits exceed £20m. This limit is also pro-rated for shorter accounting periods and reduced by the number of 51% related group companies plus one.
The deadlines for very large companies to make payments under QIPs all fall within the relevant accounting period (unlike for large companies). The first payment is due two months and 14 days after the start of the relevant accounting period. Then the remaining three payments are due at three-monthly intervals. That means all payments made to HMRC are based on estimated profits.
Unlike for large companies, companies that breach the ‘very large’ threshold will be liable to QIPs in the same year the threshold is breached.
Impact of the rule changes
As we’ve said, under the existing rules the thresholds for determining whether a company is large or very large are divided by the number of related 51% group companies plus one.
From 1 April 2023, the related 51% group company test for QIP purposes will be replaced by the 51% associated company rules.
This could mean that a company that was not previously considered large, would be large under the new rules.
Under the existing rules, a company is related to another company (including overseas companies) where:
- one company is a 51% subsidiary of another, or
- both companies are 51% subsidiaries of the same company.
This means that two companies held separately by the same individual will not be in a 51% related group.
From 1 April 2023 a company is associated to another company (including overseas companies) where:
- one has control of the other (>50% of the voting power, share capital or distribution rights of the company)
- both companies are under the control of the same person or persons.
We demonstrate the impact this has from a QIPs perspective in the example below:
Person A owns 100% of six companies. Companies 1 to 3 are unrelated companies, while companies 4 to 6 are 51% subsidiaries of each other. Under the current rules, the QIPs threshold will be £1.5m for companies 1 to 3 (being unrelated companies) and £500,000 for companies 4 to 6 (being £1.5m divided by 3).
From 1 April 2023, as all six companies are under the control of person A, and are therefore associated companies for QIPs purposes, the threshold for all six companies reduces to £250,000. This may push some or all companies into the QIPs regime, dependant on their level of profits.
For all these reasons, it’s important to conduct proper tax planning now, in advance of the rules coming in. This will ensure that UK companies are prepared, both with planning and cash flow, if QIPs do become applicable to them from 1 April 2023.
For more information about the issues raised in this article, please contact Ivy Ojediran.