What happens when a company can’t pay its Corporation Tax?

Advice for directors facing Corporation Tax arrears

When it comes to running a business in the UK, the importance of knowing how to deal with your corporation tax is essential. It is also important to know what to do if you find yourself in a situation where you can no longer pay your tax bill. In this article, we will look at some of the options available to you when this happens.

Corporation tax should be paid on an annual basis by UK companies, with the amount due being calculated based on the profit made by the company in the previous 12 months. Each company’s tax year end date differs - depending on when the company was formed – and the tax return filling deadline is usually nine months after the company tax year end. That’s when corporation tax should be paid.

Speaking with your accountant and planning ahead are the key points to ensuring your company has the funds set aside to be able to pay the corporation tax bill each year.

The small profits corporation tax rate is 19% for companies making profits of less than £50,000. So, if your company makes a £40,000 annual profit the amount of corporation tax due would be £7,600.

The ‘main rate’ of corporation tax for companies making a profit of over £250,000 is 25%. So, on a £300,000 profit a company would be due to pay £75,000 in Corporation tax.

Then for businesses that make an annual profit anywhere between £50,000 and £250,000 they pay Corporation tax at the main rate, though this is subject to reduction by a marginal relief. Talk with your accountant and make sure your finance department understand these terms. You should then set aside the relevant amounts to pay the expected corporation tax.

If a company receives a bill for corporation tax that it is unable to pay, they should liaise with their accountant and/or HMRC about the options available.

Usually, manageable solutions can be put in place, whereby companies pay late, but with interest applied over specific periods. Penalties can be applied but making a smaller payment on account on time and speaking with HMRC about the situation can buy you time.

The UK revenue and customs body who handle tax affairs – HMRC – have specific policies in place for late corporation tax payments as they know that companies often find themselves unable to make payment on time.

Profitability can fluctuate significantly over time. Your company may make big profits one year and have money saved to pay a high corporation tax bill, only to find that a few months later when the tax liability deadline comes profits have dwindled and there are insufficient funds to cover running costs and the tax bill. However, there are options available to businesses in this situation.

If your accountant files your annual company statement late you will face a penalty and then interest is charged daily on any overdue corporation tax.

In fact, as of 6th January 2023 late corporation tax payment interest increased to 6% annually (but remember it is calculated daily on the outstanding amount). Before the increase in January 2023 the previous rate was 2.75%, but the interest rate is linked to the Bank of England base rate, which has recently gone up.

If you can see yourself getting seriously behind and know that you cannot pay your corporation tax for several months after the deadline, contact HMRC. They may make a Time To Pay Arrangement with you and give you six months or potentially longer to make the corporation tax payments, if you can show that you still have a viable company and you have a good tax compliance record. Sometimes you can even get more than 12 months to pay taxes back.

If an even longer-term solution is needed, you could enter into a Company Voluntary Arrangement.

A company can take out a loan in order to cover tax liabilities, but these loans usually need to be personally guaranteed, meaning the company owners or directors would be personally liable. Liquidation would be the last resort to write off corporation tax debts, but of course that means a cessation in trading for the company.