Category: Micro Entity

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

  1. If the company pays an invoice for example from the accountant that would make the business active
  2. If the company pays its formation cost then it won’t be dormant
  3. If you have employees you will be active
  4. 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:

  1. No property revaluation – property is shown at historic cost (Mortgage lenders are not affected by this as they always require a property valuation for lending purposes)
  2. Minimal disclosure and no notes
  3. No deferred tax
  4. Most property investors fit within the size criteria
  5. 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 £632,000
  • Balance sheet total: Not more than £316,000
  • Average number of employees: Not more than 10

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

  1. 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
  2. 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)
  3. 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
  4. 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!
  5. 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

5 reasons why you need a Property Investment Company!

Student house

There are many reasons why using a company to invest in residential property is good idea and Summer Budget 2015 made companies an even more attractive option.

1. Restriction of Mortgage Interest Tax Relief

Currently this is just a ‘Policy Paper’ but the plan is to restrict 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

For a 20% tax payer that’s fine but for higher rate taxpayer its a disaster that will lead to them paying a lot more tax

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

This link shows some worked examples – Mortgages for Business

Most investors will have multiple properties and high levels of borrowing.

Furnished Holiday Lets are excluded from the restriction – Official Policy

2. Corporation Tax Rates

The current rate of Corporation Tax is 20% but its falling year on year and by 2020 it will be 18%.

Not only that, its the same rate no matter how many companies you have, previously when there were multiple Corporation Rate if you had associated companies the small companies rate was reduce in a marginal rate calculation.

Individual tax rates are

Basic rate                             20% Up to £31,785
Higher rate                            40% £31,786 to £150,000
Additional rate 45% Over £150,001

3. Capital Gains Tax

Capital Gains Tax is at 20% in companies (falling to 18% by 2020) and companies are allowed to apply HMRC Indexation Allowance to offset the effect of inflation.

Capital gain - company

Individuals get an annual allowance of £11,100 and basic rate tax payers pay 18% with higher rate tax payers paying a massive 28% with no indexation.

There are special rules for UK Companies owned by Non UK Residents.

There is no rollover relief for companies or individuals investing in Residential Property because investment isn’t a trading activity.

4. Stamp Duty

Stamp Duty (SDLT) on selling Shares is 0.5%.

Example – So £1,995 × 0.5% = £9.97. This is rounded up to the nearest £5, which means you pay £10 Stamp Duty.

Stamp Duty on Property Sales is calculated as follows

• No stamp duty will be paid on the first £125,000 of a property
• 2% will be paid on the portion up to £250,000
• 5% is paid for the portion up to £925,000
• 10% is paid on the portion up to £1.5m
• 12% is paid on anything above that

HMRC have a calculator, here is link

http://www.hmrc.gov.uk/tools/sdlt/land-and-property.htm

But you should also consider ATED (Annual Tax on Enveloped Dwellings) – more details in this blog – http://stevejbicknell.com/2014/09/12/more-tax-on-companies-owning-high-value-residential-property/

SDLT is charged at 15% on residential properties costing more than £500,000 bought by certain corporate bodies (or ‘non-natural persons’). These include:

  • companies
  • partnerships including companies
  • collective investment schemes

The 15% rate doesn’t apply to property bought by trustees of a settlement or bought by a company to be used for:

  • a property rental business
  • property developers and trader
  • property made available to the public
  • financial institutions acquiring property in the course of lending
  • property occupied by employees
  • farmhouses

The standard residential rate of SDLT applies in these cases. These exclusions are subject to specific conditions.

If 6 or more properties form part of a single transaction the rules, rates and thresholds for non-residential properties apply.

5. Inheritance Tax (IHT) and Potentially Exempt Transfers planning

One of the big benefits of Shares is that its easy to split ownership.

Potentially Exempt Transfers (PET’s) allow you to give away shares provided you survive more that 7 years after the transfer, shares make PETs easy and simple.

When you give away shares it will potentially trigger a capital gain but you will be able to use your personal capital gains allowance of £11,100 to offset this gain.

steve@bicknells.net

Small Business Saturday 2015 – Register Now!

Small-Business-Saturday-UK-Facebook-Banner-2015-White

The UK’s most successful small business campaign, Small Business Saturday, has been launched and this year it will be on Saturday 5th December.

In 2014, approximately 16.5 million adults supported at least one small business on Small Business Saturday, with almost two-thirds (64 per cent) of the British people aware of the campaign.

The organisers say…

We want all kinds of small businesses to get involved, so know that whether you are a family business, local shop, online business, wholesaler, business service or small manufacturer, Small Business Saturday is supporting you!

Small Business Saturday UK is a grassroots, non-commercial campaign, which highlights small business success and encourages consumers to ‘shop local’ and support small businesses in their communities. The day itself takes place on the first shopping Saturday in December each year, but the campaign aims to have a lasting impact on small businesses. In 2015 Small Business Saturday will take place on Saturday, December 5th.

Sign up and get involved https://smallbusinesssaturdayuk.com/

steve@bicknells.net

Why property investors like Micro Entity Accounts

Micro Entity

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 £632,000
  • Balance sheet total: Not more than £316,000
  • Average number of employees: Not more than 10

There are approximately 1.56 million micro-entities in the UK, as compared with a total number of companies on the UK register of approximately 2.8 million.

Most property businesses will have less than 10 employees and less than £632,000 turnover.

If you are a property investor filing Abbreviated or Full Accounts you have to report property values at their fair value, which means you tell everyone what you think the property is worth. You may not want to do that, especially if you are planning to sell as it tells the potential buyer what you think its worth and that might be an issue in negotiations.

Under the Micro Entity regime you aren’t allowed to use fair value and have to use Historical Cost. Which most Property Investors will prefer.

No notes are required with Micro Entity Accounts and any advances or financial commitments are shown at the foot of the Balance Sheet, often this is simply the value of the Mortgage outstanding.

steve@bicknells.net