If your limited company cannot pay corporation tax, you are likely to be in a very tough situation. With sanctions, penalties, fines, and even the potential for the forced closure of your business potentially on the horizon, it is vital that you know what to do next.
Seeking dedicated specialist assistance at the earliest possible opportunity can be your best chance of turning your situation around and ultimately reaching the ideal solution for both parties.
This blog will detail what corporation tax is payable on, when the due date is, what will happen if you cannot pay. We will also discuss what options are available to you in terms of debt repayment.
What is Corporation Tax Payable On?
Corporation tax is payable by every limited company trading and registered in the UK. The responsibility for submitting returns and paying your corporation tax on time falls to the company director. The actual rate of corporation tax has been set at 19% since April 2016, prior to this, the tax rate varied depending on business profits.
It is a legal requirement for a company director to register for corporation tax within three months from the date they start trading.
While corporation tax is intended for limited companies, there are a number of other organisations which may also need to pay, regardless of if they are incorporated or not. This includes:
- Trade associations
- Housing associations
- Co-operatives
- Members clubs/societies/associations
Sole traders will not be forced to pay corporation tax. They will instead be required to pay income tax on any profits.
While individuals will receive some forms of tax-free allowance, companies will receive no such benefits. Instead, all profits are deemed taxable.
When is the Due Day for Corporation Tax?
Exactly when the due day for corporation tax is will depend on your company’s corporation tax accounting period. Your corporation tax will be due nine months and one day after the end of this period. The most common corporation tax period will come to an end on the 31st March, meaning your tax will be due on the 1st January.
It is important that you are absolutely certain of when your corporation tax is due. Do not just assume that the 1st January is your due date, as this is not true of all businesses, and HMRC has set penalties in place for any business late filing their corporation tax returns:
- One day: £100 fine
- Up to three months: An additional £100 fine
- Up to six months: HMRC estimates your bill, then adds an additional 10% on top as a penalty
- Up to 12 months: An additional 10% is added on
Late payments three times in a row will result in the fines being upped from £100-£500.
If your company profits fall below £1.5million, your tax will be payable via a single one-off payment on your due date. However, if your company profits exceed this threshold then your corporation tax may be payable in up to four instalments.
What Happens if You Don’t Pay Corporation Tax?
If you don’t pay your corporation tax, HMRC will initially assume that you are merely late and will impose penalty charges onto your business which will accrue over time. However, if enough time passes, HMRC can seek payment in alternative —more serious — ways, including winding up petitions, or by issuing a statutory demand.
The timeline for a company that does not pay their corporation tax, or is unable to pay but does nothing to is as follows:
- HMRC will contact you asking for payment
- Bailiffs may be sent to take assets in lieu of payment
- A statutory demand can be issued, giving you 21 days to pay.
- A winding up petition can then be filed with the Courts. You will receive notice of a court date within 14 days of when you are due to appear.
- The winding up petition will be advertised in the London Gazette for other creditors to see.
- Bank accounts may be frozen meaning all transitions are cancelled
- At the hearing, your company can be forced into liquidation in order to recover the lost funds.
To avoid such an eventuality, it is important that you carefully consider your options and remain proactive — there are options open to you in the event that you can’t pay.
What Options Do I Have if I Cannot Pay Corporation Tax?
If you cannot pay your corporation tax, the most important thing is communication — the sooner you are able to contact HMRC to make them aware of your inability to pay, the better the situation will be for you. There are multiple options open to you, including a time to pay arrangement, Company Voluntary Arrangement, voluntary liquidation, and more.
It may be worth contacting a specialist at this stage who will be able to advise you on the best possible course of action for your situation. The potential options you have if you cannot pay your corporation tax include:
Company Voluntary Arrangement
A Company Voluntary Arrangement (CVA) is a process where an indebted business reaches an agreement with creditors about how they will repay their outstanding debts.
It is common in a CVA for the arrangement to be formed under the proviso that the creditors are willing to meet their creditor in the middle somewhat with regards to the timing of repayment. The benefits of a CVA are that it will likely produce much better results for both parties than many other forms of repayment.
To qualify for a CVA, the debtor company’s director must create a proposal which details exactly how much the creditor will receive, as well as a rough time scale for the repayment. A CVA is a particularly good method of debt repayment as any outstanding debts will generally be written off upon the completion of the CVA period, regardless of if the debt has been repaid in full or not.
Time to Pay Arrangement
A time to pay arrangement is a formal agreement made between HMRC and a business struggling to pay debts. During the terms of a time to pay arrangement, a company is afforded an additional 12 months in order to pay their outstanding tax bill.
Under a time to pay arrangement, struggling companies are able to spread their repayments across a longer, more manageable time frame. This can afford them more flexibility with which to continue operations to raise the required funds without jeopardising the viability of their business, and without running the risk of being unable to pay employee wages.
The main benefit of a time to pay arrangement is to give these struggling businesses more breathing room to try to come up with the necessary funds, away from the pressure from creditors.
Corporation tax is not the only type of taxation that qualifies for a time to pay arrangement — you can also undertake the scheme to repay VAT, PAYE, and more.
For additional information on what a HMRC time to pay arrangement is, and what it can do for you, check out our blog going into more detail on the subject.
Liquidation
When it comes to liquidating your business there are two common types of liquidation — Members Voluntary Liquidation (MVL) and Creditors’ Voluntary Liquidation (CVL):
MVL: A MVL is a form of liquidation for solvent companies that wish to close down. While this form of liquidation is intended to allow business owners to recoup as much money out of their business as possible, it can still be useful to repay unpaid debts.
CVL: Should your business reach the point that it is no longer solvent, you may initiate the process of liquidating it with a CVL in order to repay any remaining debts.
Regardless of which form of liquidation you choose to undertake, it is important that you contact a specialist insolvency expert who can help to carry out a thorough, detailed assessment of your company finances and help to advise you on which step to take.
For more information on liquidating your business, have a look at our detailed eBook for expert insight into the subject.
Can You Pay Corporation Tax in Instalments?
It is possible to pay corporation tax in instalments. The method of doing so will depend on the size of your business. Small businesses will be able to negotiate a Time to Pay arrangement with HMRC, whereas larger companies are routinely expected to pay their corporation taxes in instalments.
As a small business owner, if you find yourself in the position where you cannot pay your full corporation tax bill when it’s due, it is, as mentioned above, possible to pay in instalments if you can negotiate a Time to Pay Arrangement with HMRC. This is widely viewed as the most likely method for a business to spread necessary payments out over a longer period of time.
Alternatively, for larger companies the rules differ. In 2019, the UK government introduced a new system of taxation for these big businesses called ‘Quarterly Instalment Payments’ or ‘QIP’. QIP applies specifically to businesses whose profits for an accounting period are at over £1.5million (and below £20 million as different rules apply for these very large companies).
Under this new system, companies pay their corporation tax electronically via a number of instalments spread evenly throughout the year.
Can HMRC Close My Business Down?
Yes, HMRC can and will close your business down if you are unable to repay your debts or don’t comply with their requests. Ultimately, HMRC has no ties to your business or loyalty to your employees — their only goal is to recoup owed money, in any way possible. If a mutually beneficial agreement cannot be reached, HMRC will have no issue closing you down.
It’s important to remember this is HMRC’s last resort, and they will only take this step after several attempts to contact you, and sending bailiffs to your business address.
How Inquesta can Help Your Business Avoid Liquidation
If your corporation tax deadline has passed, and the threat of a winding up order is looming, it is important that you act quickly to rectify the situation and save your business.
If you find yourself in this difficult situation it is important to know the options available to you. Inquesta have a team of specialists who can guide you towards the best solution possible including:
- Disputing the amount
- Proving that you can repay the money owed
- Various debt repayment methods, such as a CVA or time to pay arrangement.
The Inquesta team has worked with countless businesses in your position, and helped them to turn their situation around. We will take the time to conduct an in-depth review of your business and provide a tailored, holistic service that puts your requirements first.
For more information, contact a member of our team today or book a free consultation.