What happens if I cannot pay Corporation Tax?

If you’re unable to settle your Corporation Tax, HMRC has the authority to initiate debt recovery proceedings for your company. Yet, by engaging with HMRC and informing them of your challenges, you might negotiate a Time to Pay (TTP) agreement. This could grant you extra time to settle your outstanding amounts and update your tax account.


What is corporation tax?

Corporation tax is a business tax applied to the profits of trading limited companies registered in the UK. Every company director must register their business for corporation tax with HMRC. Indeed, this is among the initial tasks when commencing trade under a limited company structure. It is a legal obligation to complete this registration within three months of starting to trade. Dormant companies are exempt from registering for corporation tax until their status changes.


Who pays corporation tax?

As a limited company, you must pay corporation tax when you start making a profit, although losses can be carried forward from previous years. If your business is experiencing a loss, there is no obligation to pay corporation tax, but it is essential to inform HMRC about this. Sole trader businesses are not subject to corporation tax, but they are required to pay income tax on their profits.


How much corporation tax will I have to pay?

The amount you must pay depends on your company’s annual profits. Total profits encompass earnings from regular trading, investments, rental income, and profits from asset sales.

The current corporation tax rate for companies with profits under £50,000 is 19%, referred to as the small profits rate. The main rate, set at 25%, applies to companies with profits exceeding £250,000. For companies with profits between £50,000 and £250,000, the main rate applies but is reduced through marginal relief, gradually increasing up to the 25% threshold.


What occurs if my limited company is unable to settle its Corporation Tax?

If you can’t afford to pay your corporation tax bill in full or on time, or face difficulties in doing so, it’s crucial to urgently seek expert assistance and advice. HMRC is persistent in pursuing the recovery of Corporation Tax and other owed taxes from limited companies. The sooner you address your challenges, the greater the likelihood of a favourable resolution.


When is corporation tax due and how frequently do I have to pay it?

The deadline for paying your corporation tax depends on your company’s accounting period, often set at 31 March, though it may differ. Corporation tax is payable nine months and one day after this date. For companies with a 31 March accounting period end, this translates to a due date of 1 January the following year. It’s crucial to know your specific deadline; consult your accountant if unsure.

Corporation tax is an annual payment. Companies with profits below £1.5m should make a single payment, while those exceeding £1.5m typically pay in four instalments.

Despite the complexity, as a limited company director or contractor, it is your responsibility to ensure timely payment of corporation tax. Failing to do so is a serious matter, potentially leading to HMRC seeking compulsory liquidation and closure of your company if left unresolved.


HMRC and Corporation Tax Debt

Failing to meet your obligations to HMRC, including corporation tax, will result in immediate financial penalties, escalating your debt and worsening the situation. Penalties accrue from the moment your payment becomes overdue, and interest starts accumulating. Adhering to your payment deadline is crucial to avoid these consequences. Persistent late payments may lead to distraint, issuance of a statutory demand, or even a winding-up petition.

If you find yourself unable to pay your corporation tax on time or anticipate a delay, effective communication with HMRC is vital. The sooner you inform HMRC of your situation, the more options you have, reducing the likelihood of penalties or legal action.

If you require additional time to gather funds for a full payment, consider inquiring about the possibility of paying your corporation tax in instalments. HMRC may entertain such requests, potentially assisting by establishing a payment plan.


Stopping a Winding Up Petition (WUP)

If the deadline for your corporation tax payment has lapsed and HMRC is threatening to initiate a winding-up procedure or further legal action, swift action is imperative to safeguard your business. To prevent the progression from a Winding Up Petition (WUP) to a Winding-Up Order, dispute the claimed amount by HMRC or demonstrate your ability to repay the owed sum, arranging for payment.

If these options are not feasible, the alternative is to place your company into a formal insolvency process like company administration or a Company Voluntary Arrangement (CVA). Administration temporarily suspends legal action while addressing the corporation tax debt, whereas a CVA allows the company to restructure and negotiate with creditors to reduce liabilities. These processes require the assistance of a licensed insolvency practitioner, who not only facilitates the procedure but also determines the most suitable approach for your company’s current distress.

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Alternatives for Corporation Tax Debt

If you’re grappling with corporation tax or other debts, and it seems the situation is beyond recovery, considering formal insolvency procedures to close the business might be necessary. Whether your company cannot repay its tax arrears or has substantial debts, our nationwide team of licensed insolvency practitioners at Vanguard Insolvency can explore options. This could involve negotiating a payment plan or considering closure through methods like liquidation. Contact our experts today to schedule a free, no-obligation consultation. 

David Jackson MD
Senior Partner at Vanguard Insolvency Practitioners | Website

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.