CTM92730 - CTSA: quarterly instalments: handling interest: examples
In the following examples assume that the reference rate is 5%, so the calculation of credit interest is at 4.75 per cent and debit interest at 7 per cent.
The interest calculations in the examples are rounded to the nearest pound. In practice interest is charged in pounds and pence.
The examples demonstrate the principles used in calculating debit and credit interest to the payments a company has made once its liability for an accounting period is established.
They are not representative of the calculations that companies need to make of the amounts to pay at each instalment date. In making instalment payments companies need to base their calculation of the amount to pay on their best estimate of the liability for the accounting period. The amount is likely to vary over time.
Example 1
Company A has a liability of £4 million for a 12 month accounting period ending on 31 December 2012.
It makes four quarterly instalment payments as follows:
- £1.5 million on 1 July 2012.
- £1 million on 1 November 2012.
- £1 million on 1 May 2013.
- £1 million on 1 July 2013.
- Total £4.5 million.
The company was liable to pay:
- £1 million on 14 July 2012.
- £1 million on 14 October 2012.
- £1 million on 14 January 2013.
- £1 million on 4 April 2013.
The normal due date is 1 October 2013.
Interest accrues daily, but is only calculated when the tax liability is recorded.
| - | Debit | Credit |
|---|---|---|
| The first instalment is paid early but credit interest does not start to run until the due date for the first instalment, 14 July 2012 | - | - |
| The company has overpaid by £0.5m from 14 July 2012 to 13 October 2012. It receives credit interest for 92 days | £5,986 | |
| The company has underpaid £0.5m from 14 October 2012 to 31 October 2012. It is liable to debit interest for 18 days | £1,726 | - |
| The company has overpaid £0.5m from 1 November 2012 to 13 January 2013. It receives credit interest for 74 days | - | £4,815 |
| The company has underpaid £0.5m from 14 January 2013 to 13 April 2013. It is liable to debit interest for 90 days | £8,630 | - |
| The company has underpaid £1.5m from 14.4.2013 to 30.4.2013. It is liable to debit interest for 17 days | £4,890 | - |
| The payment of £1m on 1 May 2013 still leaves an underpaid balance of £0.5m from 1 May 2013 to 30 June 2013. The company is liable to debit interest for 61 days | £5,849 | - |
| The company has still overpaid £0.5m, following the payment on 1 July 2013. It receives credit interest from 1 July 2013 to the normal due date 30 September 2013, 92 days | - | £5,986 |
| Credit interest does not run after the normal due date | - | - |
| Totals | £21,095 | £16,787 |
The total credit and debit interest is posted to the company record making a net debit interest of £4,308. The tax overpayment of £500,000 satisfies this leaving an overpayment of £495,692. Repayment interest is due on the net overpayment from the normal due date up to the date of repayment.
If there was:
- a net entitlement to credit interest, and
- an underpayment of tax at the normal due date,
the credit interest would be set off against the underpayment of tax, with effect from the normal due date. If there was a net entitlement to credit interest and no underpayment of tax, the credit interest would be payable to the company or available for set-off against other liability. Note that credit interest does not attract repayment interest.
Example 2
Company B has a liability of £4 million for its twelve month accounting period ending on 31 December 2012.
Payments (and a repayment) are as follows.
- Payment £2.5m on 1 July 2012.
- Repayment £1m on 1 November 2012.
- Payment £3m on 1 May 2013.
The company was liable to pay:
- £1 million on 14 July 2012.
- £1 million on 14 October 2012.
- £1 million on 14 January 2013.
- £1 million on 4 April 2013.
The normal due date is 1 October 2013.
Interest accrues daily, but is only calculated when the tax liability is recorded.
| - | Debit | Credit |
|---|---|---|
| No credit interest for the period before the due date for the first instalment | - | - |
| The company has overpaid £1.5m from 14 July 2012 to 13 October 2012. It is entitled to credit interest for 92 days | - | £17,959 |
| The company has overpaid £0.5m from 14 October 2012 to 31 October 2012. It is entitled to credit interest for 18 days | - | £1,171 |
| Following the repayment on 1 November 2012 the company has underpaid £0.5m until 13 January 2013. It is liable to debit interest for 74 days | £7,096 | - |
| The company has underpaid £1.5m from 14 January 2013 to 13 April 2013. It is liable to debit interest for 90 days | £25,890 | - |
| The company has underpaid £2.5m from 14 April 2013 to 30 April 2013. It is liable to debit interest for 17 days | £8,151 | - |
| Following the payment of £3m on 1 May 2013 the company is £0.5m overpaid. It receives credit interest from 1 May 2013 to the normal due date, 153 days | - | £9,955 |
| Credit interest does not run after the normal due date | - | - |
| Totals | £41,137 | £29,085 |
As in Example 1, the overpayment of tax satisfies the net debit of £12,052.