No — it adds to them, by the tax on the credit and nothing more. Instalments are worked out on the corporation tax payable for the accounting period, and the expenditure credit is not part of that calculation, so nothing comes off for it. Being taxable income, the credit raises the profit corporation tax is charged on, and the instalments with it: at the 25% main rate a quarter of the credit goes out in instalments before the whole of it comes back at the claim. Nothing is lost. What moves is the timing, and it moves the wrong way for cash.
Take £1m of qualifying spend by a company at that main rate. The credit is £200,000 and the tax on it £50,000, so the estimate of the total liability for that period should be £50,000 higher than with no claim at all, spread across the instalments. The £200,000 credit reduces no instalment. It discharges the period’s corporation tax later, at the claim.
Which companies pay corporation tax by instalments?
A company is large, and pays in four instalments over a twelve-month period, where its profits exceed £1.5m but do not exceed £20m. Above £20m it is very large and pays earlier. Profits here means the profits chargeable to corporation tax plus exempt ABGH distributions — broadly, dividends from companies outside the group. That is close to the augmented profits figure used for the small profits rate, but the instalment regulations carry their own definition and it is theirs that sets the threshold. A company with no corporation tax to pay has nothing to pay by instalments, so the question arises where profits clear the threshold — and the credit itself can be what takes them there.
Both thresholds are divided by the number of associated companies, the company itself included, for accounting periods beginning on or after 1 April 2023, and every figure here is reduced proportionately for a period shorter than twelve months. A company with five associated companies is therefore tested against £250,000, not £1.5m. Two exceptions sit underneath. A company whose total liability for the period is £10,000 or less does not pay by instalments. And a company whose profits do not exceed £10m, and which was not large in the preceding twelve months, gets a year of grace — but that £10m is divided by associated companies in the same way, so the same five associates bring it down to £1.67m. There is no year of grace for a very large company.
The dates are what make it bite. For a large company with a twelve-month period, the first instalment falls six months and thirteen days after the period starts and the last three months and fourteen days after it ends — usually well before the return carrying the claim is filed. A very large company pays four months earlier, on the fourteenth day of months three, six, nine and twelve, so every instalment falls due before the accounting period has finished.
Does the credit push a company into the instalment regime?
It can. The credit is brought into account as a receipt of the trade, so it forms part of the profits the threshold is measured against. A company forecasting £1.4m of profits with £2m of qualifying R&D spend adds £400,000 of credit and lands above £1.5m. Where associated companies divide the threshold, a smaller claim does the same.
Any forecast used to decide whether instalments apply should carry the expected credit as income. The year of grace can absorb the first period it happens in, but only the first.
Can the expected credit be taken into account when estimating instalments?
Instalments run on the company’s own estimate, which HMRC expects reviewed at each due date, with a top-up where too little has been paid and a reduction or repayment claim where too much has. But what is being estimated is the total liability: the tax payable for the period as the return calculates it, after the reliefs and set-offs that computation gives effect to. The expenditure credit is not one of them.
HMRC’s guidance on the point says so directly: the credit is a stand-alone credit and not a deduction in calculating the corporation tax liability, so it “cannot come into the calculation of quarterly instalment payments”. That guidance addresses the old RDEC, not the merged scheme, but the merged-scheme credit is built the same way in the two respects that matter: it is a taxable receipt, and it is applied to the period’s corporation tax by a separate step sitting outside the liability computation. On the sources as they stand, a company should add the tax on the credit to its estimate and deduct nothing for the credit itself.
Netting the credit off is a mistake repeated at every instalment date. Instalments that prove too low carry interest on the shortfall from each due date until the normal due date nine months and a day after the period ends. That interest runs at a lower rate than ordinary late-payment interest and is deductible, so an honest under-estimate is a cash cost rather than a penalty. Where the under-payment is deliberate or reckless, by the company or by anyone acting on its behalf, HMRC can charge a penalty of up to twice that interest.
When does the credit actually reach the cash?
At the claim, not at the instalments. The first step of the payment sequence applies the credit against the company’s liability to corporation tax for the period, and on HMRC’s reading that liability need not still be outstanding. Where the instalments have already been paid, the set-off leaves the period overpaid and the excess is repaid — but the set-off carries the date it is made as its effective date of payment, so repayment interest generally does not run. The company has funded that tax in the meantime without compensation.
The lever is the filing date, not the instalment estimate. Filing the return and the Additional Information Form earlier brings the discharge forward. Where instalments for another period are due when the claim is made, a later step in the sequence reaches them; and once a valid claim is in, HMRC accepts that a credit with nothing left to discharge can go against instalments still to fall due — in practice, the following period’s. How long an R&D tax credit takes to arrive sets out what has to be in place first, groups and connected companies covers surrender of the remainder to a group member, and accounting treatment covers where the credit sits in the accounts.
Sources
- The Corporation Tax (Instalment Payments) Regulations 1998, SI 1998/3175 (as made) — regulation 2(3) defines a company’s total liability as the tax payable for the period calculated under paragraph 8(1) of Schedule 18 to the Finance Act 1998, less deductions from payments to sub-contractors; regulation 5 sets the instalment dates, the first six months and thirteen days from the start of the period and the last three months and fourteen days from its end; regulation 13 sets the penalty, up to twice the interest, for a deliberate or reckless failure to pay. Legislation.gov.uk carries this instrument only in its original form, so the current thresholds are taken from the amending instrument and HMRC’s manual below.
- The Corporation Tax (Instalment Payments) (Amendment) Regulations 2017, SI 2017/1072 — substitutes regulation 3: a large company has profits exceeding £1.5 million but not £20 million, a very large company profits exceeding £20 million, with the £10,000 total-liability exception and the £10 million year of grace. New regulation 3(8) divides the £1.5 million, £20 million and £10 million figures by the number of group companies, and regulation 3(10) reduces all four figures proportionately for a period shorter than twelve months.
- CTM92520: large companies — profits means profits chargeable to corporation tax plus exempt ABGH distributions received other than from a company in the same group; the threshold is reduced proportionately for a short period and, for accounting periods beginning on or after 1 April 2023, divided by the number of associated companies including the company itself.
- CTM92530: special cases — the £10,000 total-liability exception and the year of grace for a company not large in the preceding twelve months, with the £10 million limit divided by associated companies in the same way as the profit threshold.
- CTM92800: very large companies — instalments four months earlier than a large company, and no period of grace.
- CTM92640: company procedure — companies review the estimate of total liability at each instalment date, top up a shortfall, and deduct or reclaim an excess.
- CTM92660: debit interest — interest on late or inadequate instalments runs at a lower rate than that generally chargeable on overdue corporation tax, up to the normal due date, and is deductible in computing profits.
- Pay Corporation Tax if you’re a large company — estimate the liability, deduct all reliefs and set-offs as when working out the tax due on the return, then revise the estimate as the period progresses.
- Pay Corporation Tax if you’re a very large company — the four instalments fall on the fourteenth day of months three, six, nine and twelve of a twelve-month period.
- FA 1998 Sch 18 para 8(1) — the calculation of tax payable for an accounting period. It contains no step for the R&D expenditure credit.
- CTA 2009 s1042H — a company claiming the credit “must bring the amount of the credit into account as a receipt in calculating for corporation tax purposes the profits for the period of the trade concerned”.
- CTA 2009 s1042I — the seven steps: step 1 applies the credit in discharging any liability to pay corporation tax for the accounting period, step 4 any other accounting period, step 5 surrender to a group member.
- CIRD89870: effect on quarterly instalment payments — the credit is a stand-alone credit and not a deduction in calculating the corporation tax liability, so it cannot come into the calculation of quarterly instalment payments; the step 1 liability need not be outstanding; the set-off carries a later effective date of payment, so repayment interest does not generally accrue; and once a return and a valid claim are in, with nothing left to discharge at the earlier steps, the company “could choose to use the credit to discharge future QIPs”, in practice those of the following accounting period. Written for the old RDEC scheme.
- CTA 2010 s18L — augmented profits, for comparison: a company’s taxable total profits plus exempt distributions of a qualifying kind that are not excluded. The instalment regulations set their own, near-identical, definition of profits.
This page describes the rules as they stood at the review date above, as general information rather than advice on your circumstances. For how that distinction works, see our terms; for an answer on your own facts, talk to us.