My VIP Tax Team question of the week: CT Instalments
Sprocket Ltd is a stand-alone company that has been a client for a few years. Historically, the company has prepared accounts to 31st December and generated profits of 100k-£500k each year. During 2021 the company was bought by a group and the new owners required the company to draw up accounts to 30th June to align it with the group’s year. Sprocket’s directors have pulled together the records needed for an 18 month period of account to 30th June 2022 and have asked for some clarification of how the changes will affect when the Corporation Tax return needs to be filed and the CT needs to be paid.

Because the period which a CT return covers (CT accounting period) is limited to 12 months by Section 10 of CTA 2009, two returns (CT600’s) are needed for the period. However, because the period of the accounts hasn’t exceeded 18 months, the due date for both CT returns is 30th June 2023, according to paragraph 14 Schedule 18 FA 1998 (CTM93030).

Payment of CT is linked to the period covered by the CT return (‘accounting period’) not the period for which accounts are prepared (‘period of account’). So, straightaway it’s clear that payment of the tax in the two returns needs to be considered separately. Because of the modest profits of the company, its CT has previously been due on 1st October following the year end (Section 59D(1) TMA 1970). However, the company’s entry into a group might have introduced the need to pay tax sooner, by instalments.

The timing of due dates for CT is modified by the Corporation Tax (Instalment Payments) Regulations 1998 (SI1998/3175). A schedule for instalments is applied to companies that are ‘large’ or ‘very large’ as defined by the regulations. Broadly, a company with profits* exceeding £1.5m is large (Reg.3(1)) and it is very large if it has profits exceeding £20m (Reg.3(2)). Hence, Sprocket has had nothing to do with instalments until now. However, the limits are modified in two ways: (i)when a company is in a group, the limits are divided by the number of members of the group; (ii) they must be rated down when a company’s CT600 period is less than a year. So, the sale of Sprocket to a group could have a very significant impact on when it pays tax. We need to know how many companies are in the group.

It’s worth noting a couple of points about the count of group members:

• Include the non-residents (even those companies that are outside the charge to Corporation Tax)
• Exclude ‘passive companies’ (broadly companies whose only business is holding 51% subsidiaries and pays out the dividends it receives. Section 279F(7) CTA 2010 defines a passive company by six criteria.)

The group that Sprocket is joining doesn’t need many members to bring the profit limits down to the kind of profits Sprocket expects to return each year. For example, if Sprocket is joining a simple group consisting of a French holding company with two subsidiaries (one in France and one in UK), we must start by counting all three companies. If the holding company satisfies the definition of a passive company, then it may be excluded. The profit limits must then be divided by three (being the two members of the group joined that we have included and Sprocket itself), to give a threshold of £500k – very close to the upper range of profits the company has been producing. Of course, if Sprocket has joined a bigger group that has at least 39 other companies that must be counted along with it then the threshold of being a very large company will be just as low or lower. However, a nicety of the law is that when considering instalments for one of Sprocket’s CT600 periods, we count up the companies with which it was related at the end of the previous period. Hence, for the year to December 2021, the company continues to be treated as standing alone.

Although we must count related companies when considering instalments for the 6 month CT600 period to June 22, two more provisions in the regulations could keep Sprocket out of paying by instalments for that period. If the actual CT bill is not more than £10k per year – £5k for this period – then it will not pay by instalments even if it would otherwise be large (Reg. 3(4)). What is more, where a company is large for a CT600 period, but it wasn’t large for the previous period then it will be treated as not being large for the current period if its profits are below a limit (Reg.3(5)). The limit is £10m for a stand-alone company with a year long period but it would be rated down for a short period (Reg.3(10)) and it would be divided by the number of companies it was related to at the end of the previous period (Reg.3(8)).

A company is expected to self-assess its position regarding instalments. Typically, instalments begin before the return is finalised – usually before the period has even ended – so a “best guess” of profits for the period needs to be kept up to date and the question needs to be re-visited regularly. A company in Sprocket’s position needs to quickly gather information about the group it has joined and the profits it is expected to produce in order to correctly comply with its obligation to pay Corporation Tax. For CT600 periods beginning on or after 1 April 2023, there is an added complexity: amendments enacted by FA 2021 mean that the ‘other companies’ that must be taken into account for dividing limits will include those that are associated by having individual shareholders in common not just through being grouped.

* Throughout the instalment regulations, a company’s profits are those chargeable to Corporation Tax plus distributions it receives from companies other than those that are its 51% subsidiaries or fellow subsidiaries of the same parent (Reg.2(2)).

Please share this article with your client!

Are you up to scratch with the VAT return changes?

Our expert speaker, Sarah Kay, will have a detailed look at the new system of penalties which replaced the default surcharge regime for all VAT returns.

The episode will be airing on 2nd February at 2pm. Register here!

Back to Community

Tax Advisor
0844 892 2473

Julian began his tax career in a small firm dealing with the tax affairs of individuals and small business concerns. He has also worked for 5 years in corporate compliance at PwC. Julian is a member of the Association of Taxation Technicians

My VIP Tax Team question of the week: CGT and gifts to non-residents
My VIP Tax Team question of the week: Settlor Interested Trusts & IHT
My VIP Tax Team question of the week: POB – Business Changes