UK Corporation Tax is a tax levied on the profits of companies operating in the United Kingdom.
For tax purposes, an accounting period is the 12-months period covered by the Company Tax Return. In most cases, this aligns with a company’s financial year (or, confusingly, sometimes called the “period of account” in tax legislation) covered by the annual accounts. The accounting period cannot be longer than 12 months and therefore longer periods covered by statutory accounts are broken down into a first 12 months and a rump accounting period.
The accounting period affects deadlines for, inter alia, Corporation Tax payments and filing a Company Tax Return.
The affect of an insolvency on Corporation Tax and accounting periods
In administration, while the appointment of an administrator ends an accounting period (on the day prior to appointment), periods run thereafter entirely as normal. Therefore, the company is likely to have at least two but often three periods in quick succession all within one period of account (to the normal accounting reference date). For instance, a company with a 31 December year end that enters administration on 1 August 2023 and ceases to trade on 30 September 2023 would have the following accounting periods:
· the 7 months period ended 31 July 2023;
· the 2 months period ended 30 September 2023; and
· the 3 months period ended 31 December 2023.
In contrast, the appointment of a liquidator also ends an accounting period (on the day prior to appointment) but then the accounting periods run annually from the date of appointment thereafter regardless.
Issues
R3 is aware that penalties have been issued to companies in administration for accounting periods that do not exist as HMRC’s computer system appears to assume the company’s accounting period post-appointment should now be the anniversary of appointment.
Another issue that R3 is aware of is where in administration there is that quick succession of accounting periods but regardless the legislation allows 12 months from the end of the period of account for returns to be filed. Under Schedule 18, Paragraph 14 of the Finance Act 1998, the filing date will be the anniversary of the accounting reference date (being the later of either 12 months after the end of the accounting period or 12 months after the end of the period of account – so it will be the latter). In the example above, all three tax returns would need to be submitted by 31 December 2024 (despite HMRC’s systems believing that the first two should be filed by 31 July 2024 and 30 September 2024 respectively).
R3’s Business Tax working group reported both issues to HMRC for investigation. In essence, the internal HMRC systems in operation insert a ‘standard length’ (i.e. 12 months) after the date of administration, as it would for a liquidation. HMRC will consider what steps can be taken to address the issues, however, this is likely to take time and, in practice, may not be rectified until their new software system is introduced in a few years.
Conclusion
Given the issues are unlikely to be fixed due to the legacy corporation tax systems at HMRC, they have asked that insolvency practitioners inform HMRC of the correct accounting periods post appointment as an administrator before eight weeks from the filing deadline. Though given HMRC’s system’s recognition of the filing deadline is one of the problems, it may be sensible to notify earlier rather than later. This will then ensure that the correct accounting periods can be created on the system manually and avoid penalties being issued.
Members have been asked to inform HMRC in writing by submitting details to Corporation Tax Services, HM Revenue and Customs, BX9 1AX. Alternatively, if the company in administration has a CCM (Customer Compliance Manager), a request can be directed to them.
This note was produced in collaboration with R3’s Business Tax Working Group.