Tolley® Exam Training

UK CORPORATION TAX CHAPTER 10

CHAPTER 10
INTEREST ON LATE PAID TAX AND REPAYMENTS
This chapter looks at interest and in particular it covers:
– interest on late paid tax and repayments;
– the effect of losses carried back.
In this chapter both FY 2013 and FY 2014 rates will apply

10.1

Introduction
Interest runs from the due date for payment to the actual date of payment of the tax where corporation tax is paid late. FA 2009, Sch 53
So, if tax due on 31 March 2015 is paid on 1 April 2015, interest runs from 31 March to 1 April and is charged for one day, as the payment was one day late.
This applies to all payments of corporation tax – whether the company pays by instalments or not. So small companies, which are required to pay their tax 9 months and 1 day after the end of the chargeable accounting period, will also be charged interest where they pay that tax late.
HMRC charges interest at an interest rate calculated as bank base rate plus 2.5%.
The current rate is 3%.
Repayments of overpaid tax receive repayment interest at an interest rate calculated as bank base rate minus 1%, with a minimum rate of 0.5%. The current rate is 0.5%. FA 2009, Sch 54

10.2

Interest on instalments
Problems are experienced particularly by larger companies, as tax due by instalments is based on the tax liability of the current year, yet the payments are made during the year. A company will therefore have the problem of estimating its tax bill, which could well change during the year, so what it pays may not reflect its actual liability. If it does not pay enough, interest on overdue tax will run.
If it pays too much, it will get repayment interest.
The rates of interest that apply to instalments are more generous. Interest is charged at base rate plus 1%, currently 1.5%.
Repayment interest is given at base rate minus 0.25% with a minimum rate of 0.5%.
These rates apply from the instalment due date until the normal due date for the accounting period, which is nine months and one day from the end of the period.
Following that date, if any tax remains unpaid or overpaid, the normal interest rates set out above will apply. This reflects the fact that a company makes instalment payments based on estimated figures, but should be more certain of its liability by the normal due date.

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UK CORPORATION TAX CHAPTER 10

 Illustration 1
Guesswork Limited estimates its profits for the year ended 31 May 2014 to be £2 million when it pays its first instalment of corporation tax.
As this is a 12 month CAP each instalment will be 3/12 × 100% = 25%. The amount of tax due for the first instalment on 14.12.13 will therefore be:
(£2,000,000 × 10/12 × 23%)+(£2,000,000 × 2/12 × 21%) x 25%

£
453,333
113,333

At the beginning of March the company wins a major new contract which is likely to increase the company's predicted profit for the year to £2.2 million. For its second instalment due on 14.3.14 the company would be advised to make a payment as follows:(£2,200,000 × 10/12 × 23%)+(£2,200,000 × 2/12 × 21%)
× 50%
Less: Tax paid on 14.12.12

498,667
249,333
(113,333)
136,000

By the end of the chargeable accounting period the draft accounts reveal a taxable profit of £2.25 million. The company should therefore pay tax as follows on
14.6.14 in respect of its third instalment:
(£2,250,000 × 10/12 × 23%)+(£2,250,000 × 2/12 × 21%)
× 75%
Less: Tax paid so far

510,000
382,500
(249,333)
133,167

By the end of August the company has been audited and the profit originally anticipated has been reduced to £2.15 million. The company should therefore pay tax as follows on 14.9.14 in respect of its fourth instalment:
(£2,150,000 × 10/12 × 23%)+(£2,150,000 × 2/12 × 21%)
× 100%
Less: Tax paid so far

487,333
487,333
(382,500)
104,833

The company prepares its final corporation tax computations by the end of
February 2015, which show a final taxable profit of £2,190,000.
The company therefore pays tax as follows on 1.3.15:
(£2,190,000 × 10/12 × 23%)+(£2,190,000 × 2/12 × 21%)
Less: Tax paid by instalments

496,400
(487,333)
9,067

It is normal for a company to keep revising its estimated corporation tax liability in this way.

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UK CORPORATION TAX CHAPTER 10

Payments Summary
Paid
(based on estimates) 14.12.13
14.3.14
14.6.14
14.9.14
1.3.15

Cumulative
(based on estimates) £
113,333
136,000
133,167
104,833
9,067
496,400

£
113,333
249,333
382,500
487,333
496,400

Due
(based on final liability)
£
124,100
124,100
124,100
124,100
______
496,400

Cumulative
(based on final liability)

Overdue/
(overpaid)

£
124,100
248,200
372,300
496,400

£
10,767
(1,133)
(10,200)
9,067

HMRC will issue an interest statement once the return has been submitted and the final liability has been calculated.
Interest Summary
14.12.13 to 13.3.14
14.3.14 to 13.6.14
14.6.14 to 13.9.14
14.9.14 to 28.2.15

Interest charged on £10,767 overdue
Interest credit on £1,133 overpaid
Interest credit on £10,200 overpaid
Interest charged on £9,067 overdue

Assuming a rate of interest on overdue instalments of 1.5% and a rate of interest on overpaid instalments of 0.5% the interest position can be calculated as follows:
£
39.82
(1.43)
(12.85)
62.60
88.14

£10,767 × 1.5% × 90/365
£(1,133) × 0.5% × 92/365
£(10,200) × 0.5% × 92/365
£9,067 × 1.5% × 168/365
Interest due to HMRC

HMRC will raise an interest demand which must be settled within 30 days. If it is settled late there will be interest charged on the interest.
HMRC have confirmed that they will accept payments of corporation tax at any time so if the company calculates and pays its corporation tax earlier this will stop the interest running.
Any interest received will be taxed as non trading profit (LR). Any interest paid by the company will be treated as interest paid on a non-trading loan and can be deducted from non trading profit (LR) income. CTA 2009, s.482(1)

10.3

Effect of carry backs
Where losses are carried back under s.37 CTA 2010 and result in a repayment of tax, then for calculating the interest on this repayment it is treated as tax repaid for the accounting period of the loss unless the repayment arises in respect of an accounting period that falls wholly within the twelve months prior to the one in which the loss arose.
If the carry back reduces an amount of unpaid tax, interest will cease to run from the due date of the period in which the loss was made for the amount of tax unpaid that the carry back negates. Apart from this it is ignored in calculating the

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UK CORPORATION TAX CHAPTER 10

interest on unpaid tax except for a chargeable accounting period falling wholly within the 12 months before the one in which the loss arose.

 Illustration 2
Carry back – scenario 1: loss used in period arising wholly in previous 12m
Y/e 31.12.13

Y/e 31.12.14

Profits

Losses

Carry back claim

←

←

Interest from
1.10.14
(actual due date)

Carry back- scenario 2: loss used in period arising NOT wholly in previous
12m
Y/e 31.12.12

P/e 30.6.13

Y/e 30.6.14

Profits

Losses

Profits

Carry back claim

Carry back claim
←

Interest from
1.4.15 (loss making period due date)

←
←

←
←

Interest from
1.4.14
(actual due date)

For carry back of non-trade deficits on loan relationships the calculation of interest on overdue or overpaid corporation tax is not affected except that in the case of underpayments the amount met by the carry back is treated as paid on the due date for the chargeable accounting period in which the deficit arose.
Otherwise it is treated as a repayment of corporation tax for the chargeable accounting period in which the deficit arose.

Q

Now test your understanding by attempting the following example(s) where relevant and the questions from this chapter in your Question Bank.

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