The Bank of England (BoE) has been steadily increasing its base interest rate over the last few months. Although the intention was to combat rapidly rising inflation, the increase will also have an impact on the tax liabilities of both individuals and businesses.
From a Corporation Tax (CT) perspective, there are a couple of possible considerations for companies.
CT late payment interest
The BoE’s decision to increase the base interest rates directly affects HMRC and the interest rates it applies on late payments of tax.
There have been 10 increases in the late payment interest rate since January 2022 (the last change before that was in April 2020). The current late payment interest rate is at 6.75% as of 13 April 2023. This represents a rise of 4% in just over a year.
This can have significant implications for a business in terms of cash flow, when coupled with an increase in the main rate of CT from 19% to 25%. And don’t forget changes in legislation to replace the 51% group company test with the 51% associated companies test for quarterly instalment payment (QIPs) purposes from 1 April 2023. More details on the associated company changes and their impact on QIPs can be found in our March 2022 Tax Talk article – New Corporation Tax rules: why QIPs may apply.
When does late payment interest arise?
A company’s normal tax payment date is nine months and one day after the company’s relevant accounting period.
Where a company has a CT liability for an accounting period, late payment interest will arise for the company in the following scenarios:
when its’ CT liability has been paid late
where payment towards its CT liability has not reduced the liability down to nil, so that late payment interest arises on the outstanding balance after the company’s due date
where its CT liability increases after the initial return submission (e.g. following an enquiry).
Interest charges arise automatically and are levied by HMRC once the tax return for the relevant accounting period has been submitted.
Where a company is considered ‘large’ or ‘very large’, and therefore falls within the QIPs regime, payments not made by the appropriate instalment due dates will incur late payment interest. This will be at the relevant rate applying to outstanding balances throughout the period up to the up to the company’s normal due date.
The interest rates that apply are shown in the table below. We also include what the position should be in the event of an overpayment to HMRC:
Interest rate levied / received
Outstanding liability after normal tax payment date (nine months and one day after company’s relevant accounting period)
Base rate plus 2.5% (currently 6.75%)
Late quarterly instalment payments (up to company’s normal tax payment date)
Base rate plus 1% (currently 5.25%)
Early payment of CT ‘credit interest’ (before normal due date, but from six months and 13 days after company’s relevant accounting period)
Base rate less 0.25% (currently 4%)
Overpayment of quarterly instalments ‘credit interest’ (up to company’s normal tax payment date)
Base rate less 0.25% (currently 4%)
Overpayment of CT after normal payment date ‘repayment interest’
Base rate less 1% (currently 3.25%)
Please note that interest paid or received from HMRC in respect of CT will be deductible/taxable for CT purposes. But the tax-deductible treatment for CT-related interest does not usually apply to interest paid to HMRC for other types of taxes, so we recommend seeking specific advice.
As interest rates are predicted to rise further in the coming months to control inflation. Companies that are liable to pay their CT via QIPs on the ‘large’ or ‘very large’ scheme could see their costs increase significantly if they fail to consider due dates and expected tax liabilities in advance.
So it’s worth taking extra care to consider whether they fall within the ‘large’ or ‘very large’ company rules for accounting periods from April 2023. That way, they can avoid excess interest charges, given the higher CT rate and changes to associated company rules.
Debt financing and Corporate Interest Restriction (CIR)
A further impact of the BoE’s interest rate increases is in relation to a company’s debt financing.
Rising interest rates have meant that existing debt held by companies may have become more costly due to likely increased interest payments. What’s more, new debt financing has become more expensive making it less appealing than before.
Where companies hold inter-company loans at low interest rates, it’s vital to consider transfer pricing, so that the rates applied can be supported as arm’s length transactions. This becomes particularly important for UK companies that are considered ‘large’ for transfer pricing purposes, and if they receive interest from connected entities.
Where a transaction is deemed not to be arm’s length, tax adjustments (increasing taxable profits) may be needed to ensure that the amount of tax payable to HMRC has not been understated.
Interest rate rises may also mean that interest expenses are more likely to be restricted under the CIR rules. A UK group (or company, if there is only one standalone company in the UK) currently has a £2m interest expense de minimis that is treated as an allowable deduction for each accounting period. Where interest expenses exceed this threshold, possibly due to higher interest charges arising from increased interest rates, a CIR analysis should be done to confirm if a disallowance is likely to be required. If so, this could affect the assessment of payments due for the year (and the relevant payment regime) as well as the potential CT interest consequences noted above.
If you would like further guidance on any of the issues raised in this article, our Corporation Tax team can provide tailored advice based on your business’s specific circumstances. Please contact Ivy Ojediran.