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The Bank of England’s (BOE) decision regarding the increase in interest rates directly affects HMRC. This means that with BOE’s increase of base rate, HMRC is also triggered to increase their interest rates against companies that made corporation tax payments, underpaid, or didn’t pay their taxes at all.
In this article, we provide comprehensive guidance for limited companies on everything they need to know about the interest on late payment of corporation tax, including its purpose, what companies can do in case they cannot pay their taxes on time, current late payment interest rates charged on underpaid quarterly dues and other penalties, whether or not late payment tax is deductible, and more.
Why is There an Interest on Late Payment of Corporation Tax?
BOE’s and HMRC’s decisions on base rate are linked. When the Bank of England base rate increases, HMRC follows. On 22 November 2022, changes in the late payment interest base rate will apply to the following taxes on their self assessment:
- Income tax
- National Insurance contributions capital (NICs)
- Capital gains tax (CGT)
- Non resident landlord tax
- Non-quarterly instalment payments of corporation tax
- Stamp duty reserve tax
- Stamp duty land tax
- Capital transfer tax
- Estate duty
- Inheritance tax
Alongside late payment interests, underpaid, overpaid, and repaid payments also receive an increased interest rate. Increased interest paid on overpaid quarterly instalment or late payments on their self assessment is primarily implemented to encourage taxpayers to be prompt on their liabilities and make sure there is fairness for on-time taxpayers.
What To Do if You Can’t Pay Tax on Time
For limited companies that are unable to pay their corporation tax or other taxes such as National Insurance contributions capital, self assessment, capital gains tax on overseas property, and value-added tax, on time or at all, HMRC offers an overpaid quarterly instalment payments option called time-to-pay (TTP) arrangement, which gives them breathing space for their tax liability.
TTP arrangement is an alternative payment plan for companies that are facing insolvency and financial difficulty, helping them get their tax return updated on a lengthier span of time. Through TTP corporation tax payment plan, they pay their taxes at an agreed amount, usually spread up to 6 or 12 months.
Companies that earn more than £1.5m per year pay their corporation tax return through quarterly instalment payments, whilst those that earn less pay it one-time. Once companies receive a bill reminder from the HMRC and anticipate that they cannot afford to pay their dues on time, they need to be proactive about it, so they would avoid HMRC’s strong debt recovery actions.
The best they can do is inform HMRC immediately and request a TTP arrangement. HMRC is highly likely to agree with companies making TTP requests that informed them earlier, not waiting for their taxes to reach beyond their due date or fall into arrears.
Companies should only agree to TTP proposal when they are sure they can religiously comply with the instalment plan, as they are still obliged to pay their current and future tax dues. Before agreeing, they should peruse the plan thoroughly, as failure to comply with TTP payment entails serious consequences.
Every limited company on a TTP arrangement pays interest at 2.6 per cent every year, charged starting from their overdue date (usually nine months and one day after their accounting period). If they pay their instalments promptly, HMRC does not impose late payment penalties.
When insolvency sets in, companies can directly call HMRC to inform them about their situation through their helpline— Business Payment Support Services (BPSS)—at 0300 200 3835. They can also get free advice on tax from free organisations in the UK, such as Advice NI, Step Change debt charity, and TaxAid.
Current Late Payment Interest Rates
HMRC’s increase in interest rates is triggered by the Monetary Policy Committee’s decision to raise the England base rate, the latter increasing bank interest from 2.25% to 3% on 3 November 2022. The gradual increase of interest for late payment of corporation tax this year by month is as follows:
| Starting Date for Increase | Interest Rate for Late Payment |
|---|---|
|
22 November 2022 |
5.50 |
|
11 October 2022 |
4.75 |
|
23 August 2022 |
4.25 |
|
5 July 2022 |
3.75 |
|
24 May 2022 |
3.50 |
|
5 April 2022 |
3.25 |
|
21 February 2022 |
3.00 |
|
23 January 2022 |
2.75 |
Other Penalties for Late Tax Payments
When companies are bound for payment interest rate and they have fallen into tax arrears, HMRC will go as far as implementing heavier enforcement action. Penalties are minimised if they are granted a TTP arrangement and comply with the agreement properly.
However, when rejected by HMRC’s Debt Management (DM) for a TTP plan, companies may receive a Distraint Oder Notice wherein the UK tax authorities forcibly takes their assets and sells these to auctions to settle their tax debts.
HMRC can also perform winding up petition to eventually force tax-indebted companies to liquidate their assets and sell them. The shareholders only get the remaining profits after the self assessment tax return bills are paid.
Is Late Payment Interest Tax Deductible?
This means interest itself is not charged against interest. Instead, it could be deducted as an allowable expense when they are computing their taxable profit for a certain accounting period.
How Legend Financial Can Help
If limited companies paid tax late, HMRC would impose on them late payment interest. Moreover, it is a good practice to inform HMRC straight away and request for a TTP arrangement before they come to the point of severe insolvency and tax arrears.
Legend Financial is here to guide you with paying your interest on late payment of corporation tax and help you request for time-to-pay arrangement if needed. Late payments can be lethal to your company as HMRC has strong debt recovery actions in place. If you are facing this problem, reach us today!
References
HMRC interest rates for late and early payments. (n.d.) Retrieved from Gov.Uk: https://www.gov.uk/government/publications/rates-and-allowances-hmrc-interest-rates-for-late-and-early-payments/rates-and-allowances-hmrc-interest-rates
Increases to Interest on Late Paid Tax. (n.d.) Retrieved from M+A Partners: https://www.mapartners.co.uk/news/late-payment-interest-increases/
Interest payable on overdue tax and penalties (including interest on overdue PAYE tax and NIC liabilities). (n.d.) Retrieved from Croner-I Navigate: https://library.croneri.co.uk/cch_uk/pctm/51-020
Interest on late paid tax. (n.d.) Retrieved from Tolley: https://www.lexisnexis.co.uk/tolley/tax/guidance/interest-on-late-paid-tax
HMRC’s late payment interest rate rises again. (n.d.) Retrieved from Ross Martin: https://www.rossmartin.co.uk/sme-tax-news/6261-hmrc-s-late-payment-interest-rate-rises-again
Latest interest rate change increases tax repayment rate. (9 August 2022). Retrieved from ICAEW: https://www.icaew.com/insights/tax-news/2022/aug-2022/latest-interest-rate-change-increases-tax-repayment-rate
What Happens if my Company Cannot pay its Corporation Tax? (26 January 2022). Retrieved from AABRS: https://www.aabrs.com/services/advice/happens-company-cannot-pay-corporation-tax/
HMRC raises interest rates on late tax bills from 5 July. (n.d.) Retrieved from Inform: https://www.informaccounting.co.uk/blog/hmrc-raises-interest-rates-on-late-tax-bills-from-5-july
HMRC Late Payment Interest Rates for Corporation Tax. (23 August 2022). Retrieved from Company Debt: https://www.companydebt.com/hmrc-tax-problems/problems-paying-corporation-tax-hmrc/interest-rates-late-payment-corporation-tax/
