How do you tell HMRC your business is active? or dormant?

When you form a new limited company HMRC will send you a letter, the letter will tell you the company UTR and it also says ‘you must tell HMRC within 3 months of starting or restarting any business activity’.

Personally I think it would much better if this was covered within the formation process, most people form a companies because they want to start business activity immediately so it would make sense that business are automatically registered or at least able to choose a date on which they will start activity, for example the start of a month, this would avoid HMRC creating multiple returns for the same year, as Corporation Tax returns can only be for 12 month period and companies are rarely formed on the 1st day of a month.

I have seen may situations where businesses forget to tell HMRC that they have started, but do submit accounts and the corporation tax return and HMRC so far HMRC have been ok with this, but that’s no guarantee that they will always be sympathetic.

What does ‘Active’ mean

Generally your 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

What’s interesting is that the definition is slightly different for

Other Taxes
Company Law
Accounting Standards

What does ‘Dormant’ mean

Your company is called dormant by Companies House if it’s had no ‘significant’ transactions in the financial year.

Significant transactions don’t include:

filing fees paid to Companies House
penalties for late filing of accounts
money paid for shares when the company was incorporated

You do not need to tell Companies House if you restart trading. The next set of non-dormant accounts that you file will show that your company is no longer dormant.

Your company will be considered dormant for corporation tax purposes in any of the following circumstances:

It is not trading and does not receive any other income. This includes investment income.
It is a new limited company that hasn’t started trading yet.
It is a flat management company.
It is an unincorporated association or charity that owes less than £100 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

To remain dormant – don’t make payments

If the company pays an invoice for example from the accountant that would make the business active
If the company pays its formation cost then it won’t be dormant
If you have employees you will be active
If you pay dividends you will be active

To stay dormant pay any costs personally and not via the company.

What are the Rules for Clubs

HMRC may treat your club or unincorporated organisation as dormant for Corporation Tax purposes if it’s active but both the following conditions apply:

your organisation’s annual Corporation Tax liability must not be expected to exceed £100
you run your club or organisation exclusively for the benefit of its members

For each year of dormancy your 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

When you think your company is dormant

If your company has stopped trading and has no other income, you can tell HMRC that it’s dormant for Corporation Tax.

If you’ve never had a ‘notice to deliver a Company Tax Return’

You can tell HMRC your company’s dormant over the phone or by post.

If you’ve filed a Company Tax Return or had a ‘notice to deliver a Company Tax Return’

You’ll still need to file a Company Tax Return online – this will show HMRC that your company is dormant for this period.

Confirmation Statements

Dormant companies still need to file the annual confirmation statement and the dormant accounts.

How do tell HMRC you are active?

Within 3 months of becoming active you need to tell HMRC, you can do this via the Government Gateway but I think its easier to write to HMRC.

Your 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

Send your letter to:

Corporation Tax Services
HM Revenue and Customs
BX9 1AX
United Kingdom

What about the self employed and Landlords?

If you earn over £1,000, then you will need to register.

For the self employed use form LC Forms (hmrc.gov.uk)

For Landlords use this form LC Forms (hmrc.gov.uk)

There are other forms for Partnerships

From April 2023 the Self Employed and Landlords earning over £10,000 a year will need file quarterly under Making Tax Digital rules.

steve@bicknells.net

When can’t property investors use Micro Entity Accounts?

Most property investors love Micro Entity Accounts:

No property revaluation – property is shown at depreciated historical cost (Mortgage lenders are not affected by this as they always require a property valuation for lending purposes)
Minimal disclosure and no notes
No deferred tax
Most property investors fit within the size criteria
No Directors Report

A company meets the qualifying conditions for a micro-entity if it meets at least two out of three of the following thresholds:

Turnover: Not more than £1m
Balance sheet total: Not more than £500,000
Average number of employees: Not more than 10

Company and Audit size changes

The changes take effect for periods commencing on or after 6 April 2025, and the new size limits are as follows:

	Micro		Small		Medium
	Old	New	Old	New	Old	New
Annual turnover	£632k	£1m	£10.2m	£15m	£36m	£54m
Gross assets	£316k	£500k	£5.1m	£7.5m	£18m	£27m
Average number of employees	10		50		250

To qualify for each size, companies need to meet 2 out of 3 the size criteria for two consecutive periods, although of course ineligible companies or those in an ineligible group remain unable to be anything other than large.

The FRC (Financial Reporting Council) aren’t big fans of Micro Entity reporting due to concerns about the minimal accounts giving a ‘true and fair’ view but the whole reason for FRS105 and Micro Entity Accounts was to simplify reporting for SME’s and they definitely do that.

FRS105 allows Investment Property – see FRS105 Section 12

There are certain companies which can not qualify as micro entities regardless of their size

Members of a group preparing group accounts.
Investment undertakings
Financial holdings undertakings
Credit institutions
Insurance undertakings
Charities

Investment Undertakings

Article 2 of the Accounting Directive – 2013/34/EU as follows:

2(13) ‧associated undertaking‧ means an undertaking in which another undertaking has a participating interest, and over whose operating and financial policies that other undertaking exercises significant influence. An undertaking is presumed to exercise a significant influence over another undertaking where it has 20 % or more of the shareholders’ or members’ voting rights in that other undertaking;

2(14)‧investment undertakings‧ means: a)undertakings the sole object of which is to invest their funds in various securities, real property and other assets, with the sole aim of spreading investment risks and giving their shareholders the benefit of the results of the management of their assets, (b) undertakings associated with investment undertakings with fixed capital, if the sole object of those associated undertakings is to acquire fully paid shares issued by those investment undertakings without prejudice to point (h) of Article 22(1) of Directive 2012/30/EU;

2(15) ‧financial holding undertakings‧ means undertakings the sole object of which is to acquire holdings in other undertakings and to manage such holdings and turn them to profit, without involving themselves directly or indirectly in the management of those undertakings, without prejudice to their rights as shareholders

Is this a problem for Property Investment Companies?

No, most property investment companies are not Investment Undertakings!

I know that sounds odd as it is a property investment and the investment makes it sound like an Investment Undertaking so lets look at this in more detail

Are there multiple shareholders? Generally not its often owned by a husband and wife (or civil partners) – if you have lots of passive investors that could make it an Investment Undertaking, we would need to look at the primary purpose of why the passive investors invested.
Are there shareholders with no involvement in the operation or management of the business? If their primary purpose was investment then it could be an Investment Undertaking – generally that’s not the case because normally property is funded by loans not shares (if you do use external investors you could fall within FCA regulations).
Are there multiple properties in the same company? This could be seen as spreading the risk which might be an Investment Undertaking but most portfolio investors are seen by HMRC and others as running a property business and they are active in running it, many new investors have multiple companies with a single property in each Company – its better for lenders (charge on property and debenture over company), its better when you sell GCT is based on the share value (net worth) and the purchaser gets very low SDLT 0.5% and may not need to refinance.
Is a small property portfolio a risk management strategy? No, the assets are all of the same class so how can it be a risk management strategy!
What about a company with one property used by a related party or member of a group? There is no management or spreading of risk so its not an Investment Undertaking.

steve@bicknells.net

How do you account payments received under Off Payroll (IR35)?

If you are a contractor working for the Public Sector or a Large Business you will be assessed against the Off Payroll rules that took effect in 6th April 2021 its a shift in the way the existing IR35 rules are applied.

Who is likely to be affected and what is it

Individuals supplying their services through an intermediary, such as a personal service company (PSC), and who would be employed if engaged directly.
Medium and large-sized organisations outside the public sector that engage with individuals through PSCs. Public sector organisations will also be affected by changes to improve the operation of the reform.
Recruitment agencies and other intermediaries supplying staff through PSCs.

Engagements with small organisations outside the public sector are exempt, minimising administrative burdens for the vast majority of businesses.

A 5% allowance is currently available to those who apply the off-payroll working rules to reflect the costs of administering them. Because responsibility is shifting from the PSC to the engager, this allowance will be removed for those engagements with medium and large-sized organisations. It will continue to be available for engagements with small organisations.

The deemed employer is the person who is responsible for:

deducting Income Tax and employee National Insurance contributions and paying these to HMRC
paying employer National Insurance contributions and Apprenticeship Levy, if applicable, to HMRC

How is the money taxed when the contractor’s company gets it?

ESM10030 – off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: how the worker accounts for and reports monies drawn from their intermediary

Remuneration

Remuneration (i.e. such as a salary) drawn by the worker from their PSC will be free of PAYE tax and NICs up to the level of the deemed direct payment, where that remuneration can reasonably be taken to be for services of that worker to a public authority or medium or large-sized organisation not in the public sector. This prevents payments being subject to double taxation (see ESM10024).

This how its processed in Moneysoft IR35 – deemed payments – how to include in RTI to HMRC | Moneysoft

Dividends

If the worker is remunerated via a dividend from their PSC, this will also be tax free up to the level of the deemed direct payment, where the dividend can reasonably be taken to be for the services of the worker to a public authority or medium or large-sized organisation not in the public sector. This only applies to dividends paid to the worker who performed the services subject to the off-payroll working rules. This dividend does not need to be returned on the worker’s self-assessment return.

ESM10035 – off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: CT accounting

Example – Corporation Tax

A worker offering their services through a PSC performs services for Major Retail Ltd, a large-sized business. The engagement is within scope of the off-payroll working rules and Major Retail Ltd deems the engagement would be one of employment if it were direct and deducts tax and NICs. For the twelve-month engagement the worker is paid £1,000 per month plus VAT of £200. Each month £400 is taken in tax and employee National Insurance with £600 plus the VAT of £200 paid to the worker’s PSC. The worker takes all £600 as a payroll payment (like a salary) each month without deducting anything further and submits this through payroll on a Full Payment Submission. The PSC has no other income during the year.

Turnover (12 x £1,000) = £12,000 (credit income)

Less Tax and NICs expense (12 x £400) = £4,800 (debit in profit and loss)

Less Payroll expense (12 x £600) = £7,200 (debit in profit and loss)

Profit = £0

If the worker instead of receiving payroll payments, takes the net amount as dividends there would be taxable profit at the end of the year:

Turnover (12 x £1,000) = £12,000 (credit income)

Less Tax and NICs expense (12 x £400) = £4,800 (debit in profit and loss)

Profit = £7,200

The PSC also gets relief, this time for corporation tax, to avoid double taxation. This relief is given by s141A Corporation Tax Act 2009. This relief is used when calculating the company’s taxable profit. A deduction equal to net amount received by the PSC, here £7,200, would be made to leave taxable profit of £0. The £7,200 can then be taken as tax free dividends.

If after filing accounts the circumstances change and the engagement should not have been one to which Chapter 10, Part 2 ITEPA 2003 applied, and tax and NICs are refunded, the necessary corrections to the accounts and tax computations must be made to reflect the new position, as the relief would no longer be due.

steve@bicknells.net

Off Payroll Working Rules – April 2020 Changes

The organisation receiving an individual’s services will be responsible for determining whether the off-payroll rules apply, so in other words the fee payer is responsible for tax and NI deductions.

From April 2020 the rules apply to Large and Medium business as well as the Public Sector, the rules are to combat none compliance with IR35.

A client organisation could be

a company
a limited liability partnership
an unregistered company
an overseas company

You can check status using the CEST – Check Employment Status for Tax – tool.

The changes don’t apply to Small businesses/organisations employing contractors, to qualify a business or organisation must

Have a turnover below £10.2 million
Balance Sheet worth less than £5.1 million
not more than 50 employees

If the rules apply the Fee Payer is not responsible for

Statutory Payments
Deducting Student Loan repayments
Automatic Enrolment into a pension
Holiday Pay

The Client has to demonstrate reasonable care in testing employment status and apply the new rules.

The Fee Payer (Client) is responsible for

Calculating deemed direct payment
Deducting tax and employee NI
Reporting and paying tax and NI including employer contribution
Consider if Apprenticeship Levy applies

Client Organisation now need to:

Review current contracts and arrangements
Establish processes for status decisions
Review internal systems for Payroll, HR and on-boarding

The changes don’t affect VAT

steve@bicknells.net

Do you need extra time to file your accounts?

You can change your company’s year end (also known as its ‘accounting reference date’) to make your company’s financial year run for more or less than 12 months.

You can only do this for your company’s current financial year or the one immediately before it.

Changing your company’s year end will also change your deadline for filing accounts, unless you’re lengthening your company’s first financial year.

https://www.gov.uk/change-your-companys-year-end

If you shorten your year end by 1 day, you will get an extra 3 months from the date of filing the notice to shorten, so for example, if your year end was 31st March and your changed it to 30th March, due to file on 31st December and filed a notice on the 31st December, you could get until the 31st March to file

The rules are in http://www.legislation.gov.uk/ukpga/2006/46/section/442

If the relevant accounting reference period is treated as shortened by virtue of a notice given by the company under section 392 (alteration of accounting reference date), the period is—
(a)that applicable in accordance with the above provisions, or
(b)three months from the date of the notice under that section,
whichever last expires.

steve@bicknells.net

HMRC lose first case to fine a Senior Finance Officer for errors

All companies must deliver correct and complete tax returns.

A company may not be able to do this if its tax accounting arrangements are not fit for purpose. These arrangements will range from how it accounts for its business transactions to how it works out its final tax liability.

Schedule 46 FA09 sets out rules for certain large companies. Those companies must establish and maintain their tax accounting arrangements and their Senior Accounting Officer (SAO) is responsible for ensuring that they do.

This guidance tells the reader about

the rules that put responsibilities on those companies and particularly their SAOs
the actions that those companies and SAOs must take
how HMRC will ensure that they comply with the rules, and
the penalties chargeable if they fail to comply.

The way in which HMRC ensures compliance with the SAO rules is consistent with HMRC’s wider strategy for Mid-sized and Large Businesses by which we seek to build and maintain open and transparent relationships with companies and to work collaboratively with them in real time to reduce their level of tax compliance risk.

Currently SAO rules only apply to large companies (turnover of £200m plus) but will HMRC extent this to smaller companies?

Senior Accounting Officer Main duty: what is the main duty

The main duty of a Senior Accounting Officer (SAO) is to take reasonable steps to ensure that a qualifying company, see SAOG11000, establishes and maintains appropriate tax accounting arrangements.

This means, in particular, that the SAO must take reasonable steps to

monitor the accounting arrangements of the company and
identify any respects in which those arrangements are not appropriate tax accounting arrangements.

Penalties

A penalty of £5,000 is charged for the following failures:

Failure by the company to notify HMRC of the name and contact details of its SAO
Failure by the SAO to carry out their main duty under the rules
Failure by the SAO to provide a certificate to HMRC, or providing a certificate that contains a careless or deliberate inaccuracy.

The penalty is payable by the person responsible for the failure, as above. The penalties are at a flat rate and cannot be mitigated.

K Thathiah v HMRC [2017] UKFTT 601 (3 August 2017)

The FTT found that a senior accounting officer (SAO) had not breached his main duty under FA 2009 Sch 46.

The case related to VAT errors totaling £1.3m despite providing ‘clean’ certificates, however, it was decided that reasonable steps were being taken to ensure the accuracy of VAT returns for example setting up a team, providing training and using an agent.

I think all SAO’s should take this a warning! get the right systems and procedures or face personal penalties

steve@bicknells.net

HMRC Tax Experts to directly advise growing businesses

On the 20th September 2017 HMRC announced

A new service to directly help mid-sized businesses as they expand and grow, has been launched today by HM Revenue and Customs (HMRC).

There are around 170,000 mid-sized businesses registered in the UK. Businesses with either a turnover of more than £10 million or more than 20 employees, and undergoing significant growth, can now seek expert help from HMRC growth support specialists.

Known as the Growth Support Service, HMRC tax experts will offer dedicated support, tailored to the customer’s needs. It has been created to help growing, mid-sized businesses access the information and services they need.

This could include:

helping with tax queries about their growing business
supplying accurate information and co-ordinating technical expertise from across HMRC
supporting them to get their tax right first time and access relevant incentives or reliefs

I wonder if HMRC have plans to help other businesses too?

steve@bicknells.net

How will Clause 24 affect you?

Clause 24 of the Finance Bill sets out restrictions for individuals on claiming mortgage interest as a cost against their property investment income, for individuals it will work as follows

2017/18 75% of the interest can be claimed in full and 25% will get relief at 20%

2018/19 50% of the interest can be claimed in full and 50% will get relief at 20%

2019/20 25% of the interest can be claimed in full and 75% will get relief at 20%

2020/21 100% will get only 20% relief

These rules will not apply to Companies, Companies will continue to claim full relief.

The rules also don’t apply to Furnished Holiday Lets.

Essentially Section 24 removes Interest from the property expenses and gives you tax relief at 20% (basic rate). So Higher rate tax payers will pay more tax.

The Mortgage Works have a spreadsheet calculator that demonstrates this and also incorporates other profits and income.

www.themortgageworks.co.uk/includes/xls/T1036_Tax_Change_Calculator.xlsx

steve@bicknells.net

Can you afford to be unethical?

Until the financial crisis in 2008 it felt like very little was being done to stop tax avoidance or unethical behaviour by businesses, but the climate has now changed.

Just because something isn’t illegal it doesn’t mean its ethical or moral and customers are now holding businesses to account.

UK waste management agency Business Waste polled 2,000 shoppers about their high street habits and found that 90% said they take a business’s ethical record and accreditation into account when it comes to things like paying taxes and environmental issues.[startup donut]

For example, 95% look for hygiene certificates and 75% want to see indications that companies they use are taking care of the planet. In addition, 45% say they would only consider using businesses that pay their tax in the UK.

Since 2012 we have seen companies like Google, Amazon and Star Bucks held to account over tax by the public accounts committee.

Back in 2014 Fair Tax was launched to try to help promote businesses who pay taxes rather than trying to avoid paying

The Fair Tax Mark Criteria assess the quality of a business’ publicly available information on key tax and transparency issues. In this context, publicly available information primarily means a full set of accounts available to all via Companies House or the company website. However, it can also include the company website and/or any other freely available printed material.

For every business type, the criteria are divided into two main categories that assess a business on:

Transparency
Tax rate, disclosure and avoidance

http://www.fairtaxmark.net/

Its time that all businesses became ethical businesses!

steve@bicknells.net

If it looks like a loan, it is a loan!

Contractors and Business Owners have been using Loans as disguised remuneration for decades.

Basically, a loan isn’t income so schemes have been created to lend money through various means. HMRC view these as tax avoidance.

How contractor loans work

In a contractor loans scheme you’re paid in the form of a loan from a trust or company, sometimes referred to as a remuneration trust.

You don’t get your payment (or ‘loan’) directly from the company you’re providing work for because it’s diverted through a chain of companies, trusts or partnerships.

The companies that promote these schemes will tell you this will save you tax.

Why these schemes could cost you more

Scheme promoters will tell you that the payment is non-taxable because it’s a loan, and doesn’t count as income.

In reality, you don’t pay the loan back, so it’s no different to normal income and is taxable.

So if you’re using one of these schemes and being paid this way you’re highly likely to be avoiding tax. You could end up paying additional taxes, penalties and interest as well as a fee to the promoter.

https://www.gov.uk/guidance/contractor-tax-loan-schemes-can-cost-you-more

What if its not called a loan?

Contractor Weekly reported this week that Contractors are now being advised to say that they holding funds in ‘fiduciary capacity’ on behalf of the company.

According to their article calling a loan by a different name doesn’t impress HMRC, it looks like a loan so it is a loan!

It is recommended that you tell HMRC about these schemes by e mailing exitstream.counteravoidance@hmrc.gsi.gov.uk

If you are using one of these schemes HMRC will be looking for you!

steve@bicknells.net