Forthcoming changes to the definition of an associated company may mean that companies within the quarterly instalment payment (QIP) regime for corporation tax may fall out for accounting periods commencing on or after 1 April 2015. Here's what you need to know.
The QIP regime can be a significant cash flow burden to any business, particularly when transitioning to the QIP regime for the first year. An understanding of the rules and the changes to them is fundamental in ensuring companies do not inadvertently make QIPs when they are not required.
What is the QIP regime for corporation tax?
A company is required to pay its corporation tax liability in quarterly instalments when its taxable profits exceed £1.5 million. An exemption applies for the first year that a company breaches this threshold, which means the QIP regime only applies in these circumstances where the company's taxable profits exceed £10 million.
The thresholds above are reduced by the number of associated companies for the period in question.
Simplifying the rules
From 1 April 2015 a company will only be an associated company if one is a 51% subsidiary of another, or both companies are 51% subsidiaries of the same company. This new rule will apply for accounting periods commencing on or after 1 April 2015 for the purpose of calculating whether a company is within the QIP regime.
This welcome simplification of the existing rules could result in a lower total of associated companies, which would increase the profit limits for determining whether a company falls within the QIP regime. For example a reduction in total associated companies from three to two would increase the profit threshold from £500,000 to £750,000.
Recommendations for the QIP regime
The Office of Tax Simplification has made several recommendations to parliament on the operation of the QIP regime. These recommendations include raising the profit threshold from £1.5 million to £5 million. This particular recommendation was included in our Autumn Statement 2014 wish-list and our joint report with the Confederation of British Industry Stuck in the middle: addressing the tax burden for medium sized business.
If you need help calculating if QIPS are required for accounting periods commencing on or after 1 April 2015, or would like to share your views on this and other tax simplifications, please contact Nicola Mandale or your usual Grant Thornton contact.