Every limited company (and any foreign company with a branch or office in the UK) must pay Corporation tax on its profits.

The Government set Corporation Tax at 19% from 2014 to 2019 for companies with profits under £300,000. This is known as the small profits rate.

The rates were due to be lowered to 17% as of 1 April 2020, but this is unlikely to now happen given the Conservative pledge to scrap this in their election campaign.

Companies with profits over £300,000 pay a much higher rate of Corporation Tax of 30%, while companies that make profits from oil extraction or oil rights pay a different rate of tax, which is a ring fenced fraction.

It’s the duty of company directors to report profits and to file accounts accurately to ensure that the correct amount of tax is paid. An accountant should file a tax return within 12 months of the company’s year end, and if the accountant should fail to do so or if the return doesn’t accurately represent the company’s tax affairs, this is still  the responsibility of directors. The accountant made an error is not considered a valid excuse by HMRC.

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    What Happens if you Don’t pay Corporation tax?

    When a company is experiencing cash flow problems and is unable to pay Corporation Tax, it’s important not to ignore demands and notices as they will start to pile up quickly.

    Contact HMRC

    If your company can’t pay before the deadline, the first step is to contact HMRC straightway via its Business Payment Support Service on 0300 200 3825. This service is open Monday to Friday, 8am to 8pm and on Saturday and Sunday from 8am to 4pm.

    If they can’t help you, you will need to speak to an insolvency practitioner or firm specialising in HMRC mediation. Speaking with an insolvency practitioner doesn’t necessarily mean you will go into liquidation. You will simply receive accurate, practical advice about the options and steps available to you in your situation.

    Time to Pay Agreements for Corporation Tax

    The tax authority will always listen to struggling businesses, and it’s important to be prepared for questions that will almost certainly be raised such as: why are you finding it difficult to pay and what have you done to try to get the money to pay the bill? How much money can you pay immediately and how long do you need to pay the rest?

    HMRC will need to know the following information about the company:    

    • Income and expenditure
    • Assets (savings and investments)
    • What the plan is to get tax payments back on track.

    The tax authority will then come to a decision as to whether tax needs to be paid immediately or whether it will be possible to get tax payments back on track with more time.

    HMRC may agree to a Time to Pay or TTP arrangement where tax payments are made in instalments over a period of six to 12 months if it believes that the company can’t afford to pay in full now, but will be able to pay in the future. The company can set up a plan to pay in instalments by Direct Debit on dates that have been agreed with the tax authority.

    However, at this point, it’s critical that directors keep these payments up to date and pay other taxes, such as PAYE and VAT as if they fail to do so HMRC will typically cancel the arrangement and may move to wind up the company immediately. HMRC is an aggressive creditor.

    When will the Company not get More Time to pay?

    If HMRC believes that the company won’t be able to get payments on track with more time, it won’t agree to a Time to Pay arrangement and it will expect the company to settle the tax bill straightaway using emergency finance. When companies fail to do so, HMRC typically begins enforcement action to collect the money owed. This could be in the following ways:

    • Through earnings or pension
    • Use debt collection agencies
    • Make direct withdrawals from bank accounts
    • Take assets and sell them
    • Take the company to court
    • Close down the business

    Are Directors Personally Liable for Corporation Tax?

    DIrectors of a limited company are considered a seperate legal entity to the companies themselves. As such, you are not liable for corporate debts in the event of insolvency, with certain exceptions.

    These include:

    • wrongful trading
    • fraudulent trading

    Both of these charges pertain to the mismanagement of companies at the point of insolvency, by which creditors interests are not prioritised as per statutory requirements.

    Where this is found to be the case, directors may be held personally liable for some or all of the money. Where HMRC is the creditor they are especially likely to take strong action to recoup their debt: they are, in fact, the largest issuer of winding up petitions in the country.