What directors need to know

Most sensible businesses consider their HMRC Corporation Tax payment as another essential but unwelcome financial liability that has to be paid.

Although a small minority think their Corporation Tax payment can be paid late or even skipped altogether, using the money for other purposes – which is frankly one of the biggest mistakes they could make. 

Corporation Tax is levied on the profits of all limited companies registered and trading in the UK and is currently set at 19%.  All businesses operating here have a legal requirement to register their business as eligible for corporation tax with HMRC within three months of beginning to trade. Sole traders are not liable for corporation tax but will need to pay income tax on their profits instead. 

They will be required to pay HMRC Corporation Tax only when they start to make a profit although they will have to notify HMRC regardless of any profit or loss.  

The taxable amount depends on the annual declared profits of the business. Total profits are calculated on the money made through usual trading activity in addition to the income received from any investments the company has made such as rental income and profits made from the sale of any assets too. 

The date corporation tax falls due depends on the individual company’s corporation tax accounting period so it will be March 31st for the majority. 

It is due nine months and one day following this date so would be due on January 1st for these companies. Businesses with profits below £1.5 million will usually pay in four separate instalments while companies lucky enough to bank over £1.5 million will make their contribution through a one-off payment. 

What happens if you can’t pay on time?

Not paying HMRC Corporation Tax will immediately see HMRC take an interest in your business and enforcement action will swiftly follow from this, usually starting with penalty charges. 

These will begin from the moment a payment is late and interest will begin to accrue increasing the overall amount owed. If the payment is not settled then further action could follow including the issuing of statutory demands and eventually a winding up petition to see the company closed and its assets sold to satisfy the outstanding corporation tax arrears.  

Before this stage they could also send for bailiffs to remove equipment and goods to the value of the amount owed. 

The immediate penalties for late payment are £100 automatically after one day; this is followed by another £100 after three months of non-payment. 

If the arrears reach six months then HMRC will take action and estimate the corporation tax bill for the business themselves with an additional 10% penalty for the unpaid tax.  Interest will also be added to late payments currently at a rate of 2.75%. 

If an entire year goes by with the debt unsettled then HMRC will add another 10% to the final total.

Time to Pay (TTP)

HMRC can reach an agreement with businesses that owe overdue payments that allows them to pay this amount called Time to Pay. 

This arrangement is not automatic and has to be granted by HMRC but would allow eligible businesses between three and six months to repay the outstanding amounts.

An insolvency practitioner can advise you on how best to approach making a TTP request but HMRC will usually require some evidence that the business is taking the overdue bill seriously and is making some effort toward reducing costs such as evidence of restructuring, selling assets or other ways to improve their financial position. 

At the very least they will be likely to want to see a detailed cash flow statement, sales forecasts, profit and loss accounts and an updated business plan to reflect how the business will repay the tax debt and function over the next few months. 

A Time to Pay arrangement shouldn’t be entered into lightly and if it is not adhered to or fails then HMRC will most likely take steps to wind up the company. 

Insolvency options

If the company cannot agree a TTP arrangement with HMRC, defaults on one or doesn’t find a way to repay the debt then the only option a business might have would be to look at a formal insolvency procedure such as an administration or even a creditors voluntary liquidation (CVL). 

Both bring an automatic insolvency moratorium which freezes all legal action against the business while allowing an insolvency practitioner valuable time to work on a recovery strategy for the company which in an administration could see changes being made to the structure and staffing of the business or other critical decisions to raise funds to ultimately repay any debt. 

A CVL would involve the orderly closure of the business with assets sold to repay creditors including HMRC but critically would also see all company debts frozen and written off which would allow the directors and business owners a new start, free from debt they’re unable to satisfy. 

Before they get anywhere near this stage, a business that has concerns about being able to repay corporation tax, VAT, bounce back loans or any other debts should get some free professional advice as a matter of urgency. 

After speaking with one of our expert advisors, they will have a better understanding of the options available to them depending on their unique circumstances and what they can do immediately to improve their situation. 

Not acting to deal with overdue corporation tax or other business debt won’t help the situation because, believe us, HMRC and other creditors will choose to act – and quickly.