What to do if you Can’t Pay your Corporation Tax Bill
It can feel highly stressful not being able to pay a corporation tax bill. If you find yourself in that situation, this article aims to explain what might happen next and the practical steps available to you.
These include paying by instalments or, if the situation is insurmountable, taking steps to close or formally rescue the company with the help of insolvency practitioners.
Do reach out to one of our experts for an informal conversation if you’d like to get some immediate advice about your particular situation and the help available.
- What is Corporation Tax?
- What Will Happen if We Can’t Pay Our Corporation Tax Bill?
- HMRC’s Approach to Corporation Tax Debt
- What are the Options if We Can’t Pay Corporation Tax?
- Pay Your Corporation Tax in Installments
- Choose Voluntary Liquidation
- Consider a Company Rescue Procedure
- Can’t Pay Corporation Tax FAQs
What is Corporation Tax?
Corporation tax is a levy imposed on the profit of limited companies. This tax is calculated based on the taxable profits, which include money made from doing business, investments, and selling assets for more than they cost (capital gains).
The deadline for paying corporation tax depends on your company’s accounting period and profits:
- Profits under £1.5 million: Due 9 months and 1 day after your accounting period ends (e.g., 31 March -> 1 January).
- Profits over £1.5 million: Paid in instalments throughout the year. See detailed rules on GOV.UK: https://www.gov.uk/corporation-tax
How much Corporation Tax will I Have to Pay?
The amount of corporation tax you need to pay depends on your company’s taxable profit. In the UK, the current standard rate for corporation tax is 19%. To calculate your corporation tax, you take your company’s total income, deduct allowable expenses and any applicable reliefs, and then apply the 19% tax rate to the remaining profit.
For example, if your company makes a taxable profit of £100,000, you would pay 19% of that, which is £19,000 in corporation tax.
What Will Happen if We Can’t Pay Our Corporation Tax Bill?
If your business is unable to pay its corporation tax, you should be prepared for the following consequences. HMRC are the UK’s largest creditor and have a very practised system of responding to default, which includes the following:
- The Company Will Be Charged Interest: You will be charged interest on the amount due from the deadline until the full payment is made. Typically, this is 5% of the tax outstanding after 30 days, an additional 5% if unpaid after six months, and 10% of the unpaid tax every year thereafter.
- Penalties for Late Payment: You will incur penalties for not paying on time, escalating the longer the tax remains unpaid. (e.g. six months, 12 months) of non-payment. These are calculated as a percentage of the unpaid tax.
- Directors Will Receive Threatening Letters: HMRC will send reminders and threatening letters, escalating to legal notices if the payment continues to be overdue.
- Enforcement Actions: If the situation persists, HMRC may take enforcement actions. This could include seizing company assets or taking court action to recover the debt.
- Impact on Business Credit Rating: Non-payment can negatively impact your company’s credit rating, affecting future borrowing and business relationships.
- Potential Personal Liability: In some cases, directors may become personally liable for unpaid taxes, especially if wrongful trading is identified.
The key thing with HMRC is to keep in communication with them if you don’t wish the situation to escalate further. They are generally quite understanding and open to flexibility if they feel your business remains viable and can bounce back.
HMRC’s Approach to Corporation Tax Debt
As the UK’s tax authority, HMRC is tasked with ensuring that all businesses comply with tax laws and pay the correct amount of corporation tax. When a business fails to pay, HMRC views this as a breach of tax compliance and, hence, not just a financial issue but an ethical one, reflecting on the company’s commitment to fulfilling its legal obligations. HMRC’s primary objective is to collect tax owed while maintaining a fair and efficient tax system.
In handling corporation tax debt, HMRC first sends reminders to the business in question, stressing the importance of paying the tax owed. If these reminders are ignored, HMRC escalates its response. It will only resort to legal proceedings, asset seizure, or even insolvency proceedings against the company if it feels its been ignored or has another good reason for escalation.
Throughout this process, HMRC maintains a stance that while they are firm in collecting taxes due, they are also open to communication.
What are the Options if We Can’t Pay Corporation Tax?
Here are your options if your company is unable to pay its Corporation Tax.
Pay Your Corporation Tax in Installments
After your initial contact with HMRC, you might consider formalising a payment plan, known as a time to pay agreement. This will allow you to spread the cost of your tax liability over a series of smaller, manageable payments. However, it’s important to ensure that the plan is realistic and adheres to your company’s cash flow capabilities, as failure to meet the agreed-upon terms could result in additional penalties.
Choose Voluntary Liquidation
If the financial strain is insurmountable and it’s not feasible to continue operating, voluntary liquidation may be an option. This is a formal insolvency procedure where a company’s assets are sold to repay creditors, including HMRC. It’s a drastic measure that results in the dissolution of the company but ensures that you meet your legal obligations.
Consider a Company Rescue Procedure
For companies that find themselves in financial difficulty but have a viable core business, rescue procedures like a Company Voluntary Arrangement (CVA) or Administration might be appropriate.
- Company Voluntary Arrangement (CVA): A CVA allows you to pay off your debts, including tax arrears, over an agreed period, while continuing to trade. This option requires approval from 75% of your creditors by value.
- Administration: This involves appointing an administrator to manage the company while options are explored for its rescue or for the sale of its assets. It offers protection from creditor action while a long-term plan is developed.
Can’t Pay Corporation Tax FAQs
What Happens If I Simply Don’t Pay Corporation Tax?
Failure to pay your corporation tax will result in immediate interest on the outstanding amount. Additional penalties are applied if the tax remains unpaid for an extended period. Ultimately, HMRC can take legal action, up to and including shutting down your company.
What Are the Penalties for Not Paying Corporation Tax on Time?
If you don’t pay the corporation tax on time, interest will start accruing on the unpaid amount from the day after the deadline. Additional penalties can be levied if the tax remains unpaid for 30 days, 6 months, and then 12 months.
Is Voluntary Liquidation an Option for Settling Corporation Tax Debts?
Yes, voluntary liquidation is a formal insolvency option to consider when you can’t pay your corporation tax. Your company’s assets are sold off to pay off debts, including corporation tax owed to HMRC. However, this also means that your company will be dissolved.
Can HMRC Seize Company Assets for Unpaid Corporation Tax?
Yes, HMRC has the authority to take control of your company’s assets to recover unpaid corporation tax. This is usually a last resort after other means of settlement have been exhausted.
Can HMRC Close Down My Company for Unpaid Corporation Tax?
Yes, as a last resort, HMRC can initiate legal proceedings to wind up your company if you fail to pay corporation tax. This will result in the dissolution of your business and the sale of assets to pay off debts, including the owed tax.