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New ‘Associated Company’ rules replaced the old ‘related 51% companies’ rules from 1 April 2023. These new rules are quite similar to the old rules; however, they could mean more companies have to be considered than previously when deciding how many associated companies a company has for tax payment purposes.
The more associated companies there are, the lower the threshold at which the main 25% corporation tax rate applies. This could mean that a company is unexpectedly liable to pay tax at 25% rather than 19%.
The number of associated companies also reduces the thresholds at which Large Company Quarterly Instalment Payments (QIPs) and Very Large Company QIPs apply. Falling into either of these regimes accelerates the timing of tax payments. Companies failing to plan for the impact of the new rules may find they pay tax late. With interest on late QIPs at 6.75% and on tax that is paid later than the normal due date charged at 8.25% (HMRC recently reset this to base rate + 4.0%), this can result in a significant cost.
The analysis of the new rules can be particularly complicated for Family and Owner-Managed Businesses and Private Equity backed businesses, where identifying all associated companies can require looking beyond 51% relationships and into the wider ownership structures of these types of companies.
With more interest at stake and additional complication on defining the number of associated companies, HMRC may be more inclined to pursue this line of investigation.
With interest on late tax payments now a potentially material amount, all companies will need to include in their cashflow planning the interest impact of when they pay their tax liabilities.
The normal due date for corporation tax payments is nine months and one day after the end of the accounting period.
Companies whose taxable annual profits exceed £1.5 million (known as ‘Large for QIPs’) must pay their tax in quarterly instalments. Companies with taxable profits exceeding £20 million also pay their tax in quarterly instalments, but these are on an accelerated timeline. These companies are ‘Very Large’ for QIPs purposes.
The first year a company falls into the QIPs regime is a ‘grace period’ meaning for that first year the company still pays tax on the normal due date. There is no grace period for Very Large companies, or where the tax liability is more than £10 million for a company falling into QIPs for the first time, and corporation tax would immediately be due to be paid in four equal quarterly instalments with some of the corporation tax being due before the accounting period end.
Companies should pay one-fourth of their estimated final liability at each payment date, and then once the taxable profits for the period are known, a final balancing payment is made on the normal due date, or a repayment is received from HMRC.
With interest rates so high, companies will need to take care with their QIPs calculations. They will need to balance carefully their cashflow management, potentially overpaying QIPs will create cashflow issues in the business against the risk of an absolute interest cost if they underpay.
Late Payment Interest
HMRC accrue interest on all late paid quarterly payments. Interest rates on late QIPs currently at 6.75% (per year) from 19 May 2025.
Penalties
HMRC does not typically apply penalties to late-paid QIPs however there are provisions in the legislation which allow them to do so at their discretion. Should HMRC seek to apply penalties, these would normally be limited to two times the interest.
If you are unable to pay your tax on time for any reason, in addition to the potential interest cost, you should seek advice on how to manage the risks of deferring the tax payment.
The Loans to Participator Rules, often referred to by their tax legislation reference as ‘section 455’ tax, which apply to ‘Close Companies’ for tax purposes (these are broadly companies that are controlled by five or fewer ‘participators’), are extended by the rules regarding ‘indirect loans to participators’ in section 459. Section 459 can result in tax levied at 33.75% being applied to ‘upstream loans’ within a corporate structure. These upstream loans can typically arise from a historic management buyout (MBO) of one or more shareholders in a Family Owner-Managed Business or in a Private Equity transaction, where cash in the business is used to fund the MBO, leaving a payable balance due from parent to subsidiary.
An upstream loan can normally be cleared by a dividend, although a dividend to clear the upstream loan should be made within nine months following the year-end in which the loan was made/the MBO took place to prevent the tax being charged. If any such tax is paid, this would be reclaimable once the upstream loan is repaid, cleared by distribution, or waived.
In practice, a group may only discover the tax implications of an upstream loan during a due diligence exercise. Whilst the tax itself is repayable, the repayment by HMRC is due only on the normal due date for the period in which the upstream loan is cleared (so normally nine months and one day after the period end). In a company sale context, this can result in a retention amount until HMRC repays the tax.
Interest on late payment of tax on loans to participators applies as it does to other tax payments, and with higher interest rates, the potential interest can be significant.
Whether or not a loan is an ‘upstream loan’ for these purposes is scenario specific, and the facts need to be carefully reviewed. However, it is generally advisable to ensure that the analysis of whether such loans could be caught within s459, and if necessary, clearing outstanding balances is completed before entering a sale process.
For corporate businesses, the Corporate Interest Restriction (CIR) limits the amount of interest expense which a business can deduct when computing its taxable profits, often to around 30% of UK taxable profits. This restriction applies if the company or group’s total UK net tax interest and financing expenses are greater than the £2 million de minimis amount. With higher interest costs, groups which were below the £2 million interest threshold previously could find themselves breaching the limit unexpectedly.
This can mean a proportion of a group’s interest cost may not attract tax relief. The rules are complex and have specific compliance requirements.
Our article here has more detail on transfer pricing, CIR, refinancing, and the taxation of interest generally.
The impact of higher interest rates can mean that businesses:
If companies don’t pay the right amount of tax when it is due, the additional cost with higher interest rates can be an unwelcome surprise. Businesses should ensure they understand how higher interest rates impact on their tax positions, especially in connection with the amount of tax that is due, so they can include the cash impact in their budgets and cashflow planning or undertake restructuring to mitigate the additional costs.
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Obligations for companies that are listed or deemed large can differ from standard sized organisations.
