Quarterly instalment tax payments for PE backed companies
Quarterly instalment tax payments for PE backed companies
A rule change for accounting periods starting after 1 April 2023, will bring more companies that are within Private Equity controlled groups into the corporation tax quarterly instalment payment (QIP) system.
The basics
Companies that are ‘very large’ must make tax payments during their accounting period where their expected profit for the period exceeds £20m – tax payments on account must be made on the 14th day of months 3, 6, 9 and 12 of the accounting period. For accounting periods starting after 1 April 2023, this profit limit is divided by the number of companies that were ’associated companies’ in the preceding accounting period (previously the limit was divided by the number of ’related 51% group companies’).
This change in the definition of the companies between which the limit must be divided is expected to bring more PE groups within the scope of the QIP rules so more companies will need to start making quarterly payments of corporation tax.
Associated companies
A company is an associated company of another company in an accounting period if for any part of the accounting period one has control of the other, or both are under the control of the same ‘person’ or ‘persons’. Broadly, companies that have not carried on a trade or business at any time in the accounting period or are passive companies are excluded from being associated.
For this purpose a ‘person’ is treated as having control of a company if the person exercises, is able to exercise, or is entitled to acquire direct or indirect control over the company’s affairs.
In particular, a ‘person’ is treated as having control if the ‘person’ possesses or is entitled to acquire:
- The greater part of the share capital or issued share capital of the company, or
- The greater part of the voting power in the company, or
- So much of the issued share capital as would, on the assumption that the whole of the income of the company were distributed among the participators, entitle the person to receive the greater part of the amount so distributed, or
- Such rights as would entitle the person, in the event of the winding up of the company or in any other circumstances, to receive the greater part of the assets of C which would then be available for distribution among the participators.
Private equity backed companies
Where a group is majority owned by a private equity fund (eg a UK limited partnership), the new rules (using associated companies) will require all of the other majority owned investments of the private equity fund to be aggregated when determining the number of associated companies for QIP purposes.
This is the same position as for accounting periods starting prior to 1 April 2015, albeit that it wasn’t until accounting periods starting after 1 April 2019 that the accelerated QIP regime took effect.
Getting ready
Given the way that most PE funds are structured, the starting assumption for any PE backed company should therefore be that it falls within the accelerated QIP regime, unless it can be evidenced otherwise. While it is theoretically possible to be able to demonstrate that a particular PE backed company does not fall in the accelerated regime, practically this will be extremely difficult as it will require details of the entities and profits of all groups controlled by the fund.
Companies in PE backed groups where the structure uses a master holding company, typical for Luxembourg fund structures, are already likely to be well versed in managing their QIPs but for others entering QIPs for the first time, ensuring that you meet the correct payment deadlines will be a significant new obligation. Estimating profits accurately can be challenging but with HMRC now charging interest on late payment of tax on QIPs at 5.5%, errors could prove expensive.
For help and advice on QIPs or any other corporation tax compliance issue, please contact Jennifer Wall or James Pratt.