Corporation Tax for companies in administration – what tax rate to use?

We explore the special rules affecting the administration and payment of Corporation Tax for companies in administration.

Following our July 2023 article on companies in liquidation, we look at the Corporation Tax treatment of companies in administration, following recent changes to HMRC’s manuals.

End of a Corporation Tax accounting period

Section 10 CTA 2009 explains how a company entering administration or a company ceasing to be in administration causes the end of a Corporation Tax accounting period. Similar provisions apply in Section 12 CTA 2009 for companies being wound up.

In many cases, companies in administration will continue to trade, even if just for a short period of time. The rules in Section 10(1)(d) will apply as normal to companies in administration and this is explained in an example in HMRC manual CTM01515.

The timing of the cessation to trade, as well as any changes to the company’s normal accounting period, could mean that there are several Corporation Tax accounting periods in the period immediately after the commencement of administration, which in turn could mean multiple payment dates.

Schedule 18 Paragraph 14 Finance Act 1998 outlines the position in respect of the due dates for Corporation Tax returns, so it will depend on the circumstances as to whether there is the same or a different deadline for Corporation Tax returns to be submitted once the company has commenced administration.

Corporation Tax rates

The applicable Corporation Tax rates for a company in administration are explained in Section 630 CTA 2010. This section covers the Corporation Tax rate to be used for the company’s final year and penultimate year, rules which are very similar to companies in liquidation.

Final year: Where the main Corporation Tax rate has been set for the final year, that is the rate to be applied. But if a main Corporation Tax rate is not set but has been proposed, such as in a fiscal statement, the proposed rate is to be used. If a rate has neither been set nor proposed, the rate set or proposed for the penultimate year should be used.

Penultimate year: Where the company is in administration before its final year and the rate for the penultimate year has not been set, the main Corporation Tax rate proposed for the penultimate year is to be used for taxing profits arising at any time in that year.

Given that the government has announced an intention to cap the main Corporation Tax rate in its Corporate Tax Roadmap, these rules may be less relevant. What may be more significant is whether the company qualifies for the 19% standard small profits rate or marginal relief.

Impact of administration on trading companies

Aside from any changes to headline Corporation Tax rates, the fact that a company being in administration may have an impact on the rate of Corporation Tax being paid, depending on whether it qualifies for the 19% standard small profits rate or marginal relief.

Regardless of the level of profits, to qualify for both the 19% standard small profits rate and marginal relief it is necessary under Sections 18A and 18B CTA 2010 respectively for the company to be resident in the UK and not be a close investment-holding company in the period.

Section 18N CTA 2010 explains that a close investment-holding company is any close company (as defined in Section 439 CTA 2010) unless it exists wholly or mainly for one or more of the stated permitted purposes. The main permitted purposes noted are carrying on a trade or trades on a commercial basis and land let to an unconnected party.

Under a special rule in Section 18N (5), a company in liquidation is to not be treated as a close investment-holding company in the first accounting period of liquidation if it was not one in the previous accounting period. However, Section 18N (5) is silent on any reference to companies in administration and we are aware that this has caused confusion amongst insolvency practitioners and tax practitioners dealing with companies in administration. 

HMRC has attempted to clarify the position in recent updates to HMRC manuals CTM60780 and CTM03951. This makes clear that Section 18N (5) does not apply to the first accounting period that a company is in administration. As such, it will only be eligible for the 19% standard small profits rate or marginal relief if it qualifies for the normal rules per HMRC’s manual CTM60710.

Therefore, if the company is not trading and/or receiving property rental from an unconnected party as it enters administration, it is likely to be classed as a close investment-holding company in the first Corporation Tax accounting period of administration and taxable profits chargeable to the main Corporation Tax rate (currently 25%). If the trade and/or property income from an unconnected party continues for a period whilst the company is in administration, the company will be able to qualify for the 19% standard small profits rate or marginal relief in the normal way, although the cessation of that trade will give rise to the end of an accounting period.

For subsequent accounting periods, the position is the same as in a liquidation in that the close investment-holding company rules will apply in the same way as any other company.

Any change in a company becoming a close investment-holding company will need to be noted as such on the corporation tax software, details of how to do that will vary between tax software packages.

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