To the relief of finance directors and tax advisers everywhere, the era of a single rate of corporation tax arrived on 1 April 2015. The new universal rate is 20% regardless of how big or small a company is. However, as the leading firm of national accountants, Baker Tilly, point out in a recent article, this single rate, the first since 1972, is not the only benefit companies can derive from the latest changes in the corporation tax regime.
The single rate of corporation tax means that companies no longer need to worry about how many associated companies it has (roughly speaking – how many companies there are under common control) as, in the past, this has affected what overall rate of tax they had to pay. However, the whole area of associated companies is still worth examining as the new corporation tax regime presents an opportunity to boost cash flow by postponing tax payments that are currently being paid quarterly on account.
Although the number of associated companies may no longer be relevant from a tax rate point of view, it could still have a strong bearing on whether a company needs to make corporation tax payments on account under the quarterly instalment payment obligation known as QIPS. Recent rule changes mean that, as of 1st April 2015, associated companies are now only classed as associated if they belong to the same group. The result is that many companies now have less associated companies than previously.
Although the rules state that companies have to pay corporation tax in quarterly instalments if their taxable profits exceed £1.5 million, this threshold is divided by the number of associated companies that they have. Therefore, if the total is, say six, then the effective threshold from a QIPS standpoint is £250,000. In other words, this means that, even with taxable profits of only a sixth of the headline threshold, a company is obliged to pay its corporation tax in quarterly instalments on account rather than 9 months after the end of the relevant accounting period.
The upshot is that many companies are still paying their corporation tax quarterly on account and missing out on up to 16 months of cash flow when they needn’t be. Those which think they might fall into this category should conduct a review of their company and group structures to confirm whether or not, under today’s associated company rules, they have fewer associates than they thought.
Anyone who has any queries regarding QIPS and associated company status or any other aspect of corporate tax should contact the corporation tax services team at Baker Tilly who will be delighted to help.