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New draft penalties for late payment of corporation tax

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On 6 July 2018, the draft Finance Bill 2019 was published. Clause 31 and Sch 13 contained drafting to introduce a harmonised penalties regime and to apply penalties to late payment of corporation tax for the first time.

Although provisions for penalties for corporation tax are included in FA 2009 Sch 56, they were never implemented and so, currently, no late payment penalties are charged. There is no commencement date for the new penalties regime in the draft legislation, but in the accompanying policy paper, HMRC indicated that there would be phased introduction, starting with VAT from 1 April 2020.

The legislation sets out a detailed list of the due dates for corporation tax for the various types of returns and also for cases where amounts become due in the absence of a return or in other circumstances. For payments of an amount shown in a tax return, the due date for penalties purposes is nine months after the end of the relevant accounting period. Where a reasonable estimate of the corporation tax amount is made and paid by that due date but when the return is filed such amount proves to be insufficient to cover the full liability, the due date for the additional amount due will be the filing date. Therefore, late payment penalties will be calculated from the filing date rather than the normal payment date.

Late payment penalties will apply as follows:

  • no penalty will be due if the tax is paid in full before the end of the 15-day period beginning the day after the due date;
  • where the payment is made between day 15 and day 30, a penalty is payable based on a percentage - yet to be specified - of the tax unpaid after 15 days;
  • where the tax remains unpaid after 30 days, a further penalty - again of an unspecified amount - is payable.

In addition, provision is made for time to pay arrangements to override penalties. A time to pay proposal must be submitted to HMRC before the penalty date, but does not have to be agreed by that date. If however an agreement is not reached, or an agreement is subsequently breached, the penalty becomes payable. A reasonable excuse defence will be available against a penalty for late payment.

There are existing penalties (of twice the interest amount) for late payment of quarterly instalment payments where the company (or someone acting on its behalf) deliberately or recklessly failed to pay the right amount on an instalment date. These provisions are unaffected by the proposed new penalties regime. However, the due date for payment of corporation tax will generally be nine months after the end of the relevant accounting period and so, in the absence of deliberate or reckless behaviour, underpayments of corporation tax instalments should not fall within the new regime unless they are not topped up by the usual due date.

Practical implications

Clearly, companies that have taken a more relaxed approach to paying corporation tax on time, on the basis that the quantum of interest likely to be payable when a late payment was made was immaterial, may need to revise this approach. Companies would be wise to begin to put systems in place to ensure that corporation tax payment dates are not missed, as the financial cost of late payment may well be material in the future. Until the penalty percentages are known, it will not be clear how much of an impact late payment penalties will have, but as the aim is to encourage timely payment, the penalty amounts are likely to be reasonably significant. That said, the penalty is not automatic. It has to be assessed and the draft legislation says that HMRC 'may', rather than 'must', assess the penalty.

Advisers frequently do not finalise corporation tax returns for their customers until the filing deadline, which is generally three months after the payment deadline for corporation tax. This is to enable them to deal with the backlog of customer queries. Although most advisers will generally have prepared sufficiently to calculate a 'reasonable estimate' of the corporation tax due, this will be necessary under the new regime. This is because, provided the corporation tax actually paid by the corporation tax deadline is a 'reasonable estimate' of the corporation tax that is due, then any top up the payment will be deemed to be due by the filing deadline for the purpose of the penalties regime. Companies and advisers will therefore need to make sure that systems are in place to make a reasonable estimate of the corporation tax liability by the payment deadline (and to retain evidence that the estimate is reasonable), often before the corporation tax return itself is finalised.

Companies paying by quarterly instalments should not be affected by the new regime any more than other corporation tax payers. However, it may be that the regime is further extended in the future to bring instalment payments fully within the harmonised system, so robust methods for estimating corporation tax liabilities should be put in place to the extent possible.

Tolley Guidance (