Times are tough and financial pressure on businesses is rising. Many companies may find themselves in a situation where they cannot afford to pay their corporation tax and don’t know what to do next.
This article will discuss the actions you can take if you are in this position.
What is Corporation Tax?
As the name exemplifies, Corporation Tax is a type of government tax that all companies must pay yearly. This is done as part of your end-of-year fiscal accounts, and your finance director or accountant will be able to advise you on the payment processes. As of 2022, Corporation Tax is charged at a rate of 19%, reduced with marginal relief, for companies with profits between £50,000 and £250,000 annually. For companies exceeding £250,000, Corporation Tax will increase to 25% in 2023.
There are a few caveats to Corporation Tax, so it’s advisable to speak with your accountant to understand what you need to budget for fully. More information on the corporation tax brackets can be found here.
What if I can’t afford to pay my Corporation Tax?
If your Corporation Tax bill is due and you cannot afford to pay, the most important thing you need to do is get in touch with HMRC immediately. Do not put this off or assume it will go away or can wait. The repercussions of unpaid tax bills can be severe. The earlier you contact them, the better the outcome will be.
If for whatever reason, you cannot get in touch with HMRC or there is nothing they can do to help you, then your next port of call should be an insolvency practitioner. Now, this does not mean that your business must start the insolvency process. It means your insolvency practitioner can help liaise with HMRC and advise you on the best action to take to save your business and stop any legal proceedings.
What are my options if I can’t pay my Corporation Tax?
HMRC aren’t so tough on struggling companies that contact them to explain they need help. They have flexible options to ensure you’re able to pay. Let’s look at some of the ways they can help.
Delaying Corporation Tax Payment
The earlier you contact HMRC, the better chance you will be able to delay your Corporation Tax payment. This is usually only for a couple of months, so you will still need a plan to clear the debt relatively soon after. HMRC have been known to offer extended payment periods during times of upheaval, such as during the Coronavirus pandemic. Therefore, during periods of economic difficulty that may make it difficult for you to pay your tax bill, they will likely understand your situation and offer help.
Negotiating a Time To Pay (TTP) agreement with HMRC
A more flexible way of paying your Corporation Tax would be through negotiating a Time To Pay agreement with HMRC. This agreement allows you to pay your Corporation Tax in manageable instalments. They can be adapted over time to reflect the state of your company’s finances, either decreased or increased, to keep payments manageable and pay off your debt quickly. One thing to be mindful of is that if HMRC doesn’t believe you’ll be able to afford repayments, they’ll refuse your negotiations.
At this point, they may begin proceedings to obtain the payment by seizing your assets or instructing debt collectors. They may even force your company into compulsory liquidation.
Pay Corporation Tax in Instalments
This is like TTP and can be done as part of a TTP agreement. Essentially, it’s a negotiation to pay in instalments that your company can afford monthly. Usually, the payment terms are between six and twelve months. As with TTP, HMRC may refuse any negotiations if they do not think you’ll be able to meet the payment terms. They can also end an active agreement if you fail to pay at any time.
Should I close my company using a Creditors’ Voluntary Liquidation?
Unfortunately, if you find yourself in a place where you cannot afford to pay your Corporation Tax, even with negotiated plans with HMRC, it may be time to consider liquidation. Being unable to meet tax requirements likely means that your business has become insolvent.
A Creditors’ Voluntary Liquidation (CVL) is a way to begin the liquidation process and keep some elements of control, such as choosing your preferred insolvency practitioner. This is a voluntary process, and appointing an insolvency practitioner allows them to carry out the process on your behalf. Their job is to liquidate the company as efficiently as possible, often by selling assets to repay creditors. Any remaining debts will then be written off, and directors cannot be held liable for payments unless they have signed a personal guarantee. More importantly, entering a CVL stops creditors from being able to pursue legal action and force you into compulsory liquidation.