As a business owner, you undertake various responsibilities, and paying your Corporation Tax is one of them. However, financial situations can quickly change, and you may find your business in a situation where you cannot make your Corporation Tax payment.
First of all, don't panic. Second, if you act quickly, you can get on top of the tax debt before worsening. In this article, you'll learn what to do if you cannot pay Corporation Tax and the options available to remedy the problem.
What Is Corporation Tax?
Corporation tax is a corporate tax that all UK Limited Companies must pay on all annual profits and capital gains.
When a business begins trading, the company Director must register the business to start paying corporation tax to HMRC. Each year, each UK profit-earning Limited Company pays Corporation Tax.
Corporation tax is one of the tax requirements you must pay as a business, much like income tax. However, you pay income tax from personal earnings, whereas corporation tax is on your business's profits.
Your corporation tax will depend on your company's annual profits. The current rate of corporation tax is as follows:
- Profits under £50,000: 19%, the small profit rate
- Profits over £250,000: 25%, considered the main Corporation Tax rate
You won't receive a Corporation Tax bill per se; you must work out, pay and report your tax. So, from registering your business, you must keep accounting records and prepare a Company Tax return to determine how much Corporation Tax to pay.
Once you've worked out how much you owe, you pay Corporation tax within nine months and one day after the end of your accounting period. Even if you don't have to pay anything, you will still need to report it. You must then file your Company Tax Return by your deadline, typically 12 months after your accounting period ends.
What Happens If You Don't Pay Corporation Tax?
If your business cannot pay its Corporation Tax, contact HMRC.
If you do notify HMRC of your situation, you could make the matter much worse. If you don't pay corporation tax and ignore demands and notices, HMRC will take debt recovery action against your company. HMRC can issue you a Winding Up Petition, and your company may face compulsory liquidation.
A Winding Up Order is a formal legal tool creditors use against businesses that owe them money. If a Winding Up Petition is successful, your company will face compulsory liquidation. Your company will be forced to stop operation and liquidate assets to pay off the debts owed.
When Corporation Tax is paid late, you'll have to pay late payment penalties and an additional interest of 2.75%. So, regardless of whether you've been forced into liquidation or come to an agreement on when to pay your corporation tax, you'll have an added payment penalty on top.
Late payment penalties are as follows:
- One day late: £100
- Three months late: An additional £100
- Six months late: HMRC will estimate your Corporation Tax bill and add a 10% tax arrears penalty
- One year late: Another 10% of any unpaid tax
If your tax return is late thrice a row, the £100 penalties are increased to £500 each. Should your business have a proven reason behind the payment delay, you can appeal against the late filing penalty.
Options Available to You If You Cannot Pay Corporation Tax
If your businesses can't afford to pay your corporation tax arrears in full or on time, you may have to consider other options:
- Time to Pay arrangement: An agreed payment plan to settle tax arrears over an agreed period.
- Formal insolvency procedure: Company Voluntary Arrangements (CVAs) are long-term solutions and involve formally renegotiating multiple debts, including tax debt.
- Voluntary liquidation: Creditors' Voluntary Liquidation (CVL) protects creditors and helps companies fulfil legal requirements to pay tax debts.
Time to Pay Arrangement
As soon as you know you cannot pay Corporation Tax, contact them, and you may be eligible to create a payment plan (Time to Pay arrangement) that's more affordable for your business.
A Time to Pay arrangement is a flexible formal contract that can be amended over time. The length of the arrangement is determined by how much your business owes and its financial circumstances.
You must act quickly if you wish to pay Corporation Tax in instalments. So, inform HMRC of your business's financial difficulty, talk it out with them first, and see if you can apply for a Time to Pay arrangement before they potentially issue a Winding Up Petition.
You must submit a request for a Time to Pay arrangement in writing with supported documents. The documents need to include proof of your company's financial situation. HMRC will examine your financial position and assess if your business can repay the debt.
Formal Insolvency Procedure
If you're past the point of applying for a Time to Pay arrangement, consider company administration or a Company Voluntary Arrangement. CVAs allow you to negotiate with HMRC and other lenders to generate liquidity while the business continues trading.
Your company must be insolvent to be able to apply for a CVA. An insolvency practitioner must oversee the process, and all creditors involved must agree on the proposal.
The insolvency practitioner will create an arrangement covering the tax debts and any other debts you may have. They'll then write to creditors about the arrangement and invite them to vote. If the CVA is approved, you'll make scheduled payments to the creditors through the insolvency practitioner over the agreed time.
Voluntary Liquidation
If you cannot pay your tax debt, your business must enter insolvency and cease trading. Creditors' Voluntary Liquidation involves liquidating your company's assets and using the proceeds to pay your debts. Otherwise, HMRC will force the closure of your business if you can't pay your tax debt.
Final Thoughts
Times can be difficult for businesses, but there are options to help you pay your Corporation Tax. It's important to remember communication is vital; contact HMRC if you can't pay the tax owed. Making HMRC aware of your situation will help you in the long run as you can work with them to find a suitable arrangement so you don't have to close your business.
If you need help handling the situation and further advice, we advise speaking to your financial advisor and seeking help managing your company's finances.
