Updated guidance from HMRC on active, non-active and dormant statuses.
HMRC has recently updated its guidance on being ‘active’, trading and non-trading, and being dormant for new or existing companies and organisations.
Active, trading and non-trading – what’s the difference?
It is important you fully understand the different categories before advising clients, especially when considering the tax registration implications.
What is active for corporation tax purposes?
Generally a company or organisation is considered to be active for corporation tax purposes when it is, for example:
- carrying on a business activity such as a trade or professional activity
- buying and selling goods with a view to making a profit or surplus
- providing services
- earning interest
- managing investments
- receiving any other income.
Note that this definition of being active for corporation tax purposes is not necessarily the same as that used by:
- HMRC in relation to other tax areas such as VAT
- other government agencies such as Companies House.
It may also not match definitions used by issuers of accounting standards such as the Financial reporting Council.
When does trading or non-trading affect things?
There are a number of circumstances (some rather complicated) where HMRC would generally consider a company or organisation not to be active for corporation tax purposes.
- If it has not yet engaged in any business activity (business activity means carrying on a trade or profession, or buying and selling goods or services with a view to making a profit or surplus). This means that a newly-formed company or organisation may not be active for corporation tax purposes (as per above definition) but it may still carry out activities (known as ‘pre-trading activities’) or incur costs (known as ‘pre-trading expenditure’) without HMRC deeming that it has started trading. HMRC gives the following examples of such activities that are not considered trading. These are however fairly limited and include 1) preliminary activities such as writing a business plan or negotiating contracts and 2) preliminary expenditure such as incurring costs with a view to deciding whether to start a business
- When the company or organisation has previously traded but has stopped trading (HMRC sees this as dormant).
What does dormant for Corporation Tax mean?
For corporation tax purposes, HMRC views a dormant company as a company that’s not active, not liable for corporation tax or not within the charge to corporation tax. A dormant company can be, for example:
- a new company that’s not yet trading
- an ‘off-the-shelf’ or ‘shell’ company held by a company formation agent intending to sell it on
- a company that will never be trading because it has been formed to own an asset such as land or intellectual property
- an existing company that has been – but is not currently – trading
- a company that’s no longer trading and destined to be removed from the companies register.
What about clubs and unincorporated organisations?
HMRC may treat your club or unincorporated organisation as dormant for corporation tax purposes if it’s active but the following conditions both apply:
- the organisation’s annual corporation tax liability must not be expected to exceed £100
- the club or organisation is run exclusively for the benefit of its members.
For each year of dormancy the organisation must not have any:
- allowable trading losses for which it may want to claim relief
- assets it’s likely to dispose of, which would give rise to a chargeable gain
- interest or annual payments to pay out from which tax is deductible and payable to HMRC.
HMRC will write to the organisation proposing to make it dormant. It will not send a ‘Notice to deliver a company tax return’ and it will review this at least every five years. HMRC may also apply this treatment to a flat management company.
HMRC will not treat an organisation as dormant if it is a:
- privately owned club run by the members as a commercial enterprise for personal profit
- housing association or a registered social landlord (as designated in the Housing Act 1986)
- trade association
- thrift fund
- holiday club
- friendly society
- company which is a subsidiary of, or is wholly owned by, a charity.
What must happen if an entity is active?
A company must tell HMRC within three months of starting their tax accounting period if it is within the charge of corporation tax and is now active. The best way to register is to use HMRC’s online registration service. However it can also register for corporation tax in writing. The letter must include:
- the company’s name and registration number
- the date the company’s accounting period started
- the date to which the company intends to prepare accounts
- the company’s principal place of business
- the nature of the business being carried out by the company
- the name and home address of each director of the company
- if the company has taken over another business, the name and address of the former business and also the name and address of the person from whom the business was acquired
- if the company is a member of a group of companies, the name and registered office address of the parent company
- if the company has been obliged to comply with the Income Tax (Pay as You Earn) Regulations 2003, the date on which that obligation first arose.
The letter must be:
- signed by a company director or company secretary
- include a declaration that the information is correct and complete to the best of their knowledge.
The letter should be sent to:
Corporation Tax Services
HM Revenue and Customs
Unincorporated organisations such as clubs, societies and associations must also tell HMRC if they become active. This should be in writing to the address above.
Penalties for non-registration with HMRC
If after 1 April 2010, you don’t tell HMRC that your company or organisation is liable for corporation tax, the penalty is based on the amount of tax that’s unpaid or that your company or organisation is liable for. This is called the potential lost revenue or PLR.
In addition, if the company or organisation has corporation tax to pay but doesn’t receive a ‘Notice to deliver a company tax return’ from HMRC, it must still tell HMRC it’s liable for corporation tax within 12 months of the end of the corporation tax accounting period. If it does not, the company or organisation may be charged a penalty. HMRC calls this a ‘failure to notify’ penalty.
Article from ACCA In Practice