Working out instalment payments

A company has to estimate its tax liability for the current accounting period (net of all reliefs and set-offs) and then make instalment payments based on that estimate. If the estimate changes, the company will need to recalculate its instalment payments based on the revised figure.

For most large companies (those with no ring fence profits) the amount of each instalment for a 12 month accounting period will be one quarter of its total liability.

Where there are no ring fence profits the amount of each instalment for any accounting period is calculated using the formula 3 x CTI/n where:

  • CTI is the amount of a company's total liability for that accounting period
  • n is the number of months in the accounting period.

To work out the amount of each instalment a company needs to:

  • estimate the tax payable for that accounting period
  • use that amount of tax to represent CTI in the formula
  • work out 3 x CTI/n
  • allocate that amount or CTI, whichever is smaller, to the first instalment payment
  • carry on doing this for later instalments, revising the figure for CTI as necessary, until the total amount allocated is equal to CTI.

Example 6 (Short accounting period)

A large company has an accounting period from 1 January 2006 to 31 August 2006. The company has profits of £3 million and a tax liability of £900,000 for this accounting period. The company has no ring fence profits.

Step 1 - Work out CTI
CTI = £900,000

Step 2 - Work out 3 x CTI/n
3 x £ 900,000/8 = £337,500

Step 3 - Work out the amount for the first instalment
Whichever is the smaller of Step 1 or Step 2 will be the amount of the first instalment. £337,500 (Step 2) is smaller than £900,000 (Step 1), so the first instalment will be £337,500. This amount is due on 14 July 2006.

Repeat this exercise for the second instalment due on 14 October 2006 (which falls after the end of the company's accounting period).

Second instalment = £337,500.

The third, and final, instalment is due on 14 December (three months and 14 days after the end of the accounting period). This instalment will be (£900,000 - (2 x 337,500) = £225,000), bringing the total paid up to £900,000 (CTI).

For large companies with ring fence or both ring fence and other profits you need to calculate the ring fence instalments separately from any instalments in respect of other tax.

For ring fence, for an accounting period that ends after 30 June 2005 but before 1 July 2006 you use the formula 3 x RFA/n, and for accounting periods ending thereafter 4 x RFA/n where:

  • RFA is the ring fence tax amount
  • n is number of whole months falling within the accounting period plus the appropriate decimal.

To work out the amount of each ring fence instalment a company needs to:

  • estimate the ring fence Corporation Tax and supplementary charge payable for that accounting period
  • use that amount of tax to represent RFA in the formula
  • work out 3 x RFA/n, or 4 x RFA/n depending on when the accounting period ends
  • allocate that amount or RFA, whichever is smaller, to the first IP
  • carry on doing this for later instalments, revising the figure for RFA as necessary, until the total amount allocated is equal to RFA.

Revised company estimates

A company's estimate of its tax liability may change up to and even beyond the last instalment payment date. The instalment payments system is flexible and allows a company that realises it has made inadequate payments to make top-up payments at any time.

A company will normally be able to claim back all or part of any instalment payments if it later finds it has paid too much (or should not have made a payment at all). Alternatively, the company may leave the overpayment with HM Revenue & Customs and adjust subsequent instalment payments.