Cash flow is the lifeblood of a business, and managing it effectively is especially important as the Bank of England raises interest rates to its highest in 15 years in an attempt to contain inflation. 

Against this backdrop, businesses should be aware of a change to the quarterly instalment payments (QIPs) rules that will accelerate cash payments to HMRC for many profitable companies, particularly those controlled by private equity firms, infrastructure funds or family offices.

Background

Previously a company was considered large and therefore required to make quarterly payments of corporation tax where its corporate profits exceeded a threshold of £1.5 million, divided by the number of group companies. Since 2015, the number of group companies for this purpose was determined by reference to the number of 51% companies in the same group in the preceding accounting period. 

For accounting periods beginning on or after 1 April 2023, the “51% group” test has been replaced by “associate company” test whereby the threshold is divided by the number of associated companies. This is a much wider test, as companies are deemed associated if one controls the other, or if they are under the control of the same person or group of persons for any part of the accounting period. 

Persons include individuals, partners in a partnership, and trustees. Control is defined by reference to the close company rules, and includes control over the companies’ affairs, voting power, share capital, income or assets. As before, non-UK companies are included, but wholly dormant companies may be excluded. Certain wholly passive holding companies may also be excluded. 

Practical impact

Many companies owned by financial investors may now fall within the quarterly instalment regime because common control will be exercised on all of the investments in the fund portfolios under the same ownership (and not only the specific asset group, or the same fund). 

As a further practical impact, whilst a one-year grace period may apply on breaching the £1.5 million ÷ the number of associated companies limit (as long as profits do not exceed £10 million ÷ the number of associated companies), no such grace period applies with respect to “very large” companies, that is companies with taxable profits exceeding £20 million, divided by the number of associated companies.

As an example, the very large threshold would be reduced from £20 million to £1 million if four groups of five companies were under common control – being £20 million ÷ (4 x 5). It is important to remember this test includes worldwide companies and the reduced threshold is then applied to each UK company. Hence losses in non-UK companies in the same group, or UK companies in groups under common control for this test do not ameliorate profits in profitable UK companies for this purpose. 

Very large companies pay quarterly instalments on the 14th day of months 3, 6, 9, and 12 within the accounting period to which they relate (i.e. the first instalment was due on 14 June 2023 for accounting periods beginning on 1 April 2023). This is earlier than quarterly instalment for large companies, which are due on the 14th day of months 6, 9, and 12 within the accounting period, and month 4 of the following accounting period)  

Therefore, it is possible that companies that have not previously fallen within the quarterly instalment regime may move directly to the very large payment regime (or from large to very large), with a subsequent impact on cash flow. 

It is also worth noting that HMRC is now charging late payment interest at 7.75% from 22 August 2023, from 7.5% previously. This rate increases automatically at 2.5% over the Bank of England base rate.

How businesses can prepare

The new rules are likely to bring more companies into the quarterly instalment payments regime and have a particularly significant impact on private equity-owned businesses. Therefore, it is important to conduct proper tax planning to understand the full associated companies’ position and how they will affect the business’ cash flow. Please contact A&M’s Tax team members to learn more about the changes and how to prepare.

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