Improving cash flow to help pay corporation tax bill

CT bill timing

If, for whatever reason, your company is facing a downturn in its trade, the last thing it needs is a substantial corporation tax (CT) bill. The trouble is that because of how CT bills are timed this might well be the outcome.

Example. Acom Ltd’s profit for the year to 31 December 2023 was £200,000. CT is due on this nine months and one day after the end of the accounting period and so it must pay £49,250 on 1 October 2024. Between 1 January and 30 September 2024 Acom makes a loss. While this can be used to obtain a refund for some of the CT, the usual rules mean it must pay the bill first.

Loss relief timing

The rules allow companies to reduce the CT payable on current profits where they made losses in earlier years. But losses made in the current year can’t be set against the previous year’s CT bill until the accounts for the loss-making period have been prepared and a corresponding claim for relief made. In our example that would mean Acom waiting until at least January 2025 to reclaim some of the CT it paid for 2023. This won’t help Acom when it’s struggling to find the £49,250 in October 2024.

Funding your tax payment

Acom could ask the bank for money, but it will probably charge a stiff arrangement fee, plus interest. This might dig Acom out of a hole in the short term but in the longer run will make its financial position worse. Alternatively, it could ask HMRC for a time-to-pay arrangement. There’s no fee involved but like the bank it will charge interest, and the rates of interest currently charged by both institutions are relatively high.

Alternatively, Acom can change its accounting period which will accelerate tax relief for some of its current losses. Tax and company law allow a company to extend its accounting period to cover up to 18 months. This could help Acom’s cash flow.

Example. Bcom Ltd (which has no associated companies) has a financial year end of 31 March. Its management accounts at the end of February indicate a taxable profit for its financial year 2023 of £150,000. The CT payable on this is £36,000, due on 1 January 2025. Bcom also predicts losses of £30,000 for the six months to 30 September 2024. Extending its accounting period to the maximum 18 months reduces its profit to £120,000 with a corresponding reduction in its CT bill.

A CT period must not exceed twelve months so following the change of accounting date Bcom completes a CT return for the year to 31 March 2024 and one for the six months to 30 September. The £120,000 profit is time apportioned: £80,000 for the 2023 financial year and £40,000 for the six months April to September. The corresponding CT bills are: £17,450 on 1 January 2025 and £8,720 on 1 April 2025.

As a result of the change of accounting date Acom’s CT bill for January 2025 is less than half the original sum due.