Associated companies – Quarterly Instalments of Corporation Tax

What were the rules?

The rules, known as the associated companies rules, effectively treat companies under common ownership as one entity for the purposes of calculating the rate of corporation tax. As there is now one rate of corporation tax, there is no need for these provisions.

However, this was not the only instance where the associated companies rules affected the corporation tax payments with the main one being the payment of corporation tax in quarterly instalments. Given that the rules are abolished for accounting periods beginning on or after 1 April 2015, when the unified rate came into force, it is necessary to introduce new rules for those companies liable to make quarterly instalment payments.

How does this affect the corporation tax position?

Generally, corporation tax is payable 9 months and 1 day after the end of the accounting period. However, companies with profits of more than £1.5m are required to make quarterly payments on the 14th day of month 7, 10, 13 and 16 after the start of the accounting period.

Thus, for example, if a company has a year end of 31 December 2015 and profits of more than £1.5m (and did so in the previous year), then they will be required to make payments of corporation tax on 14 July 2015, 14 October 2015, 14 January 2016 and 14 April 2016. This is as opposed to the later due date of 1 October 2016 for most smaller companies with a 31 December 2015 year end.

This means that the company will be required to estimate taxable profits for the year to calculate the quarterly instalments that are payable. This should be reviewed frequently to ensure that the company is not underpaying (or indeed overpaying) the ultimate corporation tax liability.

What if the company’s profits are less than £1.5m?

Usually, no quarterly instalment payments are due.

However, the limit of £1.5m is shared between the number of associated companies. For example, if Simon owned 100% of the share capital of two companies, as they are associated, then if one company made profits of more than £750k, it would be caught by the quarterly instalment regime.

It should also be noted that the limit of £1.5m applies where the accounting period is 12 months long. If it is less or more than 12 months, then the £1.5m is prorated accordingly. For instance, if the accounting period is 9 months, then the limit is reduced to £1.125m i.e. 9/12 x £1.5m. This would then be divided by the number of associates.

So what are the changes?

Due to the abolition of the associated companies test, it was necessary for the Government to consider a test to determine if a company was required to make quarterly instalments. The new rules refer to a related 51% group test for the purposes of calculating whether quarterly instalments apply. In other words, if the company is part of a group of companies, then quarterly instalments may be payable.

In the above example, Simon owns the share capital outright and therefore for accounting periods starting on or after 1 April 2015, the companies would both be subjected to the £1.5m limit, rather than the £750k limit in the example.

However, if Simon owned 100% of Company A which owned 100% of Company B (i.e. a group structure was in place), then the quarterly instalment rules would still apply due to introduction of the new “51% group” test for the purposes of working out quarterly instalments.

If you have any questions, please call our tax team at your nearest location.