Every UK Limited liability company must be registered for corporation tax but what happens if it cannot pay corporation tax?
What Is Corporation Tax?
Corporation tax is reported to HMRC on a Corporation Tax Return known as a CT600.
It is a company tax only. It does not apply to individuals or to the directors personally.
There were in the tax year 2021-2022 around 1.5 million companies that had some corporation tax to pay representing some 51% of the total number of UK companies that submitted a corporation tax return. Of the small medium companies (SMEs) the average tax bill for that year was around £18,000.
Corporation Tax Deadlines
A company’s corporation tax return has to be filed with HMRC within 12 months of the company’s year end. The filing of that CT600 tax return triggers the liability that HMRC are aware of for your company’s corporation tax.
When Do You Pay Corporation Tax?
A company has to pay corporation tax within 9 months and one day of the year end for a company whose taxable profits are £1.5 million or less.
If a company’s taxable profits are more than £1.5 million but less than £20 million then the company has to pay corporation tax by four quarterly installments.
However, whilst there is that period of time when arrears can build up it is important not to ignore the situation as trading to the disadvantage of HMRC (the Crown) can be a sign of Wrongful Trading which carries the risk for a Director of personal liability for the period when trading carried on for inappropriately. Trading to the detriment of the Crown is a very common cause of Director disqualification proceedings. It is therefore important that you obtain professional advice to explore all of your options.
Corporation Tax Late Payment Penalties
If you do not pay the corporation tax bill on time then late payment penalties will arise. With effect from August 2023 late payment interest rate is 7.75%. If you pay HMRC early then interest is received by the company at the rate of 4.25%.
HMRC Late Filing Penalties
The sooner you pay off your HMRC corporation tax bill the better otherwise you may incur late payment penalties as follows:
If you fail to file the CT600 corporation tax return a day late then there is a penalty of £100 as a minimum or £200 if it is filed more than three months after the deadline. After six months HMRC then will estimate the corporation tax bill and add a penalty of 10% of the unpaid tax and then after twelve months they will add another 10% of any unpaid tax.
If your tax return is late 3 times in a row, the £100 penalties are increased to £500 each.
What Happens If You Cannot Pay Corporation Tax?
HMRC will take action if a company does not pay its taxes when they fall due. If a company is struggling to pay its corporation tax that is due nine months after its year end then it can anticipate HMRC chasing letters to start arriving to remind it that a payment is overdue.
It is not advisable to ignore this situation as HMRC will take prompt action to collect debts due to it. Interest and penalties can be levied on the company for late payment of corporation tax which can make the situation even more serious.
If a company cannot pay corporation tax that is a sign of company cash flow problems and that it is insolvent.
If the situation is not resolved then HMRC will escalate matters and could use HMRC debt collectors to pursue recovery of the corporation tax due. It can then move to issue a Winding Up Petition which can stop the company from being able to trade and lead to it being wound up by being placed into Compulsory Liquidation.
Options If You Can’t Pay Corporation Tax
If you can’t pay corporation tax then you have various options.
HMRC says if you have difficulties paying HMRC:
Contact HM Revenue and Customs (HMRC) as soon as possible
Ignoring an inability to pay HMRC corporation tax is not going to make the problem go away so get in touch with HMRC as soon as possible to discuss the matter.
The effect of getting in touch with HMRC will:
- Show a recognition of the problem.
- Show your intent to do something about it.
- Put on record your being responsible as a company director as part of your director duties.
- Hopefully, it will help you as a director feel less stressed because you are taking positive action.
- Reduce your uncertainty about what is likely to happen and what your options available to you are.
- Enable you to plan ahead and develop a strategy to address the matter.
Try A Time To Pay Arrangment If You Cannot Pay Corporation Tax
You should get in touch with HMRC to discuss the matter and consider entering into a Time To Pay Arrangement.
This can start off as a verbal agreement to pay the corporation tax debt over a period of time but it will likely be turned into a formal written agreement if there is a breach of the verbal agreement.
Formal Insolvency Rescue Procedures Such As A Company Voluntary Arrangement
If the company’s financial position is in struggling then it may well need to consider opting for a formal insolvency procedure to see if it can be rescued such as a Company Voluntary Arrangement or Administration if it has a profitable core business that is capable of being saved.
A Company Voluntary Arrangement is a structured formal insolvency plan overseen by an Insolvency Practitioner over a period of typically three to five years subject to the agreement of creditors. It can involve writing off significant amounts of creditor debt including HMRC corporation tax but it requires 75% of creditors voting on the arrangement to approve it.
Creditors Voluntary Liquidation To Wind Up The Company
If the company cannot be rescued then Voluntary Liquidation such as a Creditors Voluntary Liquidation is likely to be one of the most appropriate ways to enable an orderly winding down and closure of an insolvent company that cannot pay corporation tax and is without a viable future.
Helping Your Company When It Can’t Pay Tax
If your company cannot pay the corporation tax then it is important that a focused approach is adopted when dealing with HMRC by showing you are taking the matter seriously and acting responsibly.
Cash Flow Forecast
One way you can do this is to prepare a cash flow forecast. You may need to ask for your accountant’s assistance in preparing such a document. This will hopefully enable you to justify the period of time you ask HMRC to let you have if you approach it for time to pay. Once you have assembled this information then you can approach HMRC’s Payments Support Service and discuss the matter with them.
If however, HMRC is unwilling to accept your proposals then you may have to consider other options such as Liquidation.
Who Is Exempt From Corporation Tax?
Only companies that do not make a profit do not need to pay corporation tax. If your business is loss making in the year in question then make HMRC aware of this so they can formally make the company exempt.
Voluntary Liquidation If You Can’t Pay Corporation Tax
We can assist you with Voluntary Liquidation if you can’t pay your company’s corporation tax because of a severe cash flow problem and insolvency.
Please do not hesitate to get in touch with our CEO, Elliot Green for a free no obligation discussion to explore your options. The sooner you get in touch the sooner we can start to help you and the earlier you do so potentially the more options that may be available to you.
