Tag: corporation tax

Are “Free” Lease Extensions Really Tax Free? The Hidden Tax Trap for Share-of-Freehold Flats

Share of freehold flats and the tax implications of free lease extensions

Why ownership, valuation and market value need to be checked before extending a lease

If you own a flat with a share of the freehold, extending your lease to 999 years and reducing the ground rent to a peppercorn can seem like little more than an administrative exercise.

After all, if the leaseholders effectively own the freehold between them, why should anyone have to pay for a lease extension?

And if no money changes hands, surely there can’t be any tax?

Unfortunately, it isn’t necessarily that simple.

A lease extension can potentially create tax consequences even where the leaseholder pays nothing.

The key questions are:

  • Who actually owns the freehold?
  • Does a company own the freehold beneficially, or is it merely holding it as nominee for the leaseholders?
  • What is the existing lease worth?
  • What is the extended lease worth?
  • What is the freeholder’s reversionary interest worth?
  • Is value being transferred from the freeholder to the leaseholder?
  • Are the parties connected?
  • Is the transaction taking place at market value?

These questions should be answered before the leases are extended, not afterwards.

Let’s look at why.

Why Extend a Residential Lease?

Many blocks of flats have a structure where the leaseholders collectively control the freehold, often through a residents’ management or freehold company.

The individual flats remain leasehold.

The company owns the registered freehold.

Each flat owner may also own a share in that company.

Over time, the leaseholders may decide to extend their leases—perhaps to 990 or 999 years—and reduce the ground rent to a peppercorn.

Commercially, that can make perfect sense.

A longer lease may:

  • make the flat easier to sell;
  • make mortgage finance easier;
  • remove concerns about a diminishing lease term;
  • eliminate future ground rent liabilities; and
  • potentially increase the value of the flat.

But that final point is exactly where the tax question begins.

A “Free” Lease Extension Can Transfer Value

Suppose a flat is worth £400,000 with its existing lease.

After extending the lease and reducing the ground rent to a peppercorn, it is worth £450,000.

The obvious question is:

Where did that additional £50,000 of value come from?

Economically, at least some of that value may previously have been represented by the freeholder’s reversionary interest and its rights under the existing lease.

By granting the longer lease, value can move from the freehold interest into the leasehold interest.

If the freeholder is a company, that transfer of value may have tax consequences—even if the leaseholder hasn’t written the company a cheque.

For Capital Gains Tax purposes, HMRC generally treats an extension of a lease outside its original terms as involving a surrender of the existing lease and the grant of a new lease.

This is why describing the transaction as a “free lease extension” can be misleading from a tax perspective.

Bicknell Towers – A Worked Example

Let’s take a fictional block called Bicknell Towers.

Bicknell Towers contains eight flats.

Each flat owner owns:

  • the lease of their individual flat; and
  • one share in Bicknell Towers Freehold Limited.

Bicknell Towers Freehold Limited is shown at HM Land Registry as owning the freehold.

The existing leases have around 75 years remaining and provide for ground rent.

The residents decide that they would like to:

extend every lease to 999 years and reduce the ground rent to a peppercorn.

Nobody intends to charge anybody anything.

It sounds straightforward.

But before the solicitor prepares the lease extensions, there are two crucial questions we need to answer.

Question 1 – Who Really Owns the Freehold?

This is arguably the most important question in the whole transaction.

Are Free Lease Extensions Taxable? – Steve J Bicknell Tel 01202 025252

The fact that Bicknell Towers Freehold Limited is shown at HM Land Registry as the registered proprietor does not necessarily answer the question of beneficial ownership.

We may need to examine:

  • the company’s Articles of Association;
  • the circumstances in which the freehold was originally acquired;
  • shareholders’ agreements;
  • declarations of trust;
  • historic correspondence;
  • company resolutions; and
  • the company’s accounts.

Why?

Because there can be a fundamental difference between the company holding the freehold:

as nominee or trustee for the flat owners

and

beneficially in its own right.

If the company is merely holding the freehold as nominee for the leaseholders, the tax analysis may be very different.

If, however, the company owns the freehold beneficially, granting valuable 999-year leases to its shareholders for nothing could potentially represent a disposal of part of the company’s valuable freehold interest.

Bicknell Business Advisers’ Advice

Don’t assume that owning one share in the freehold company means you beneficially own one-eighth of the freehold.

Company ownership and beneficial ownership are not necessarily the same thing.

Establish the legal position before doing the tax calculation.

Question 2 – What Is the Lease Extension Actually Worth?

Once ownership has been established, the next step is normally to obtain a professional valuation.

It isn’t sufficient to say:

“We’re all shareholders, so we’ll just extend the leases for £1.”

For tax purposes, the transaction may need to be considered by reference to market value, particularly where connected parties are involved.

A suitably qualified valuer may therefore need to consider:

  • the value of the flat before the extension;
  • its value after the extension;
  • the remaining term of the existing lease;
  • the existing ground rent;
  • the value of the freeholder’s reversion;
  • the effect of extending the lease; and
  • the value attributable to reducing the ground rent to a peppercorn.

This isn’t simply a compliance exercise.

The valuation may drive the tax calculation.

How Could the Freehold Company’s Tax Be Calculated?

Let’s return to Bicknell Towers.

Assume, purely for illustration:

Value of flat before lease extension: £400,000

Value after lease extension: £450,000

Value potentially transferred: £50,000

The actual valuation of a lease extension is more sophisticated than simply subtracting one flat value from another, so professional valuation advice is essential.

However, these figures demonstrate the principle.

For tax purposes, the grant of a long lease out of a freehold can constitute a part disposal of the freehold interest.

That brings us to an important Capital Gains Tax calculation.

The A ÷ (A + B) Formula

Where there is a part disposal of an asset, the original acquisition cost normally needs to be apportioned.

The familiar formula is:

A ÷ (A + B)

Broadly:

A = market value of the part disposed of

B = market value of the part retained.

The resulting proportion determines how much of the freeholder’s original allowable cost can be attributed to the disposal.

That attributable cost is then taken into account when calculating the gain.

This can become particularly important where a company acquired a freehold many years ago for relatively little money.

Bicknell Towers – A Simplified Corporation Tax Example

Suppose James owns Flat 1 at Bicknell Towers and is also a shareholder in Bicknell Towers Freehold Limited.

The company grants James a 999-year lease extension and reduces his ground rent to a peppercorn.

James pays the company nothing.

For illustration, assume:

CalculationAmount
Market value attributed to lease extension£50,000
Less attributable allowable cost(£5,000)
Illustrative gain£45,000

If that £45,000 gain were chargeable at a 25% Corporation Tax rate, the illustrative tax would be:

£45,000 × 25% = £11,250

The actual tax calculation would, of course, depend on the valuation, the company’s original acquisition cost, the precise legal structure, available reliefs and the company’s Corporation Tax position.

But it demonstrates the potential problem.

James paid £0.

The residents called it a free lease extension.

Yet Bicknell Towers Freehold Limited could potentially have a taxable transaction based on market value rather than cash received.

That is why valuation and ownership need to be established before proceeding.

Could James Also Have a Tax Issue?

Potentially.

From the leaseholder’s perspective, extending a lease outside its existing terms can involve the surrender of the old lease and acquisition of the replacement lease.

That means there may potentially be a disposal for Capital Gains Tax purposes.

If Bicknell Towers is James’s main residence and the necessary conditions are satisfied, Private Residence Relief may protect some or all of the gain.

But what if Flat 1 is:

  • a buy-to-let;
  • a second home;
  • owned by a company; or
  • a property that hasn’t always been James’s main residence?

The position needs closer examination.

This is another reason why every leaseholder’s circumstances shouldn’t automatically be assumed to be identical.

What About ESC D39?

There is an important HMRC concession known as Extra-Statutory Concession D39. CG71240 – Leases: disposal: extension of lease: ESC D39 – HMRC internal manual – GOV.UK

Broadly, subject to its conditions, HMRC may allow the surrender of an existing lease and grant of a replacement lease to be treated as involving no disposal of the old lease and no separate acquisition of the replacement lease.

However, the conditions matter.

One important consideration is whether the transaction takes place on terms equivalent to those that would have been agreed between unconnected parties bargaining at arm’s length.

That creates an obvious question at Bicknell Towers.

If Bicknell Towers Freehold Limited grants James a lease extension worth £50,000 and James pays:

£0

would independent parties have agreed the same transaction?

This needs careful consideration rather than assuming ESC D39 automatically applies to every lease extension.

Could There Also Be a Distribution Problem?

This is perhaps the tax trap that will surprise readers most.

Suppose Bicknell Towers Freehold Limited beneficially owns the freehold.

The company then grants James, one of its shareholders, a valuable lease extension for nothing.

Economically, the company may have transferred value to its shareholder.

That raises a separate question:

Could the benefit provided to James amount to a distribution for tax purposes?

Potentially, yes.

The company/shareholder tax consequences therefore need to be considered alongside the company’s chargeable gain.

In the wrong circumstances, it isn’t necessarily just the company’s Corporation Tax position that needs attention.

There could potentially also be a personal tax consequence for the shareholder receiving the benefit.

What If James Pays Market Value?

You might think there is an easy answer.

Instead of giving James a £50,000 lease extension for nothing, Bicknell Towers Freehold Limited charges him £50,000.

That may help address some of the market-value and arm’s-length issues.

But it creates another practical problem.

Bicknell Towers Freehold Limited now has:

£50,000 cash

What happens to it?

If the money remains within the company, that may be fine.

But if the intention is ultimately to return it to James or distribute accumulated funds amongst the shareholders, extracting that cash may itself have tax consequences.

So simply saying:

“We’ll charge market value.”

doesn’t necessarily solve the overall problem.

You need to consider the entire transaction, not one tax in isolation.

What About SDLT?

Stamp Duty Land Tax (SDLT) should also be checked.

Extending the term of a lease can, for legal and SDLT purposes, amount to the surrender of an existing lease and the grant of a replacement lease.

There are specific SDLT rules concerning surrender and regrant transactions, consideration and overlapping leases.

In many share-of-freehold lease extension arrangements there may ultimately be little or no SDLT to pay, particularly where there is no chargeable consideration.

However, I would not assume that every lease extension is automatically outside SDLT.

Check the specific transaction.

Seven Things to Check Before Extending a Lease

Before Bicknell Towers signs anything, I would want answers to these seven questions:

1. Who legally owns the freehold?

Check the Land Registry title.

2. Who beneficially owns the freehold?

Don’t assume the registered proprietor tells the whole story.

3. Is the company a nominee or the beneficial owner?

This could fundamentally change the tax analysis.

4. What is the existing lease worth?

Obtain professional valuation advice.

5. What will the extended lease be worth?

You need to understand how much value is being transferred.

6. What would independent parties pay for the extension?

A nominal £1 consideration doesn’t necessarily mean the taxable value is £1.

7. What taxes need to be considered?

Potentially:

  • Corporation Tax;
  • Capital Gains Tax;
  • taxation of distributions; and
  • SDLT.

Only once those questions have been answered would I recommend proceeding with the legal documentation.

The Biggest Mistake – Extend First, Ask the Accountant Later

This is probably the most important point in the whole article.

Leaseholders naturally start by speaking to their solicitor.

That’s understandable—the solicitor prepares the lease extension.

But the solicitor preparing the lease may not be responsible for calculating:

  • the freehold company’s Corporation Tax;
  • the shareholder’s personal tax position;
  • the market value transferred; or
  • the wider tax implications of the structure.

Once the 999-year leases have been granted for nothing, the transaction has happened.

It can be considerably more difficult to address an unexpected tax liability afterwards.

Bicknell Business Advisers’ Advice

The correct order should normally be:

1. OWNERSHIP → 2. VALUATION → 3. TAX → 4. STRUCTURE → 5. LEGAL DOCUMENTATION

Don’t sign first and calculate the tax later.

What Does “Share of Freehold” Actually Mean?

This phrase causes enormous confusion.

Estate agents routinely advertise flats as:

“Share of Freehold”

But that description tells you surprisingly little about the underlying legal and tax structure.

You might own:

  • a share in a company that beneficially owns the freehold;
  • a direct beneficial interest in the freehold;
  • an interest under a trust;
  • a company share carrying particular contractual rights; or
  • some other legal arrangement.

Those aren’t necessarily the same thing for tax purposes.

So before granting a valuable lease extension for nothing, establish precisely what everyone actually owns.

A “Free” Lease Extension Isn’t Necessarily Tax Free

That is really the takeaway from Bicknell Towers.

The residents may look at the arrangement and think:

“We already own the freehold, so we’re simply extending our own leases.”

But if Bicknell Towers Freehold Limited actually owns the freehold beneficially, the tax analysis could look very different.

The company may potentially be disposing of a valuable interest in land to its shareholders.

That is why two apparently identical blocks of flats can potentially have completely different tax outcomes.

It depends on what the legal documents actually say.

Don’t Forget the Valuation

If there is one practical lesson beyond establishing ownership, it is this:

Get the property professionally valued.

Tax advisers cannot reliably calculate a market-value tax charge by guessing the value of a lease extension.

A suitably qualified surveyor or leasehold valuation specialist may need to determine the value of:

  • the existing lease;
  • the extended lease;
  • the freeholder’s interest before the transaction;
  • the retained freehold interest afterwards; and
  • the value being transferred.

Those numbers then allow the tax adviser to calculate the potential consequences properly.

How We Can Help

At Bicknell Business Advisers, we advise landlords, property investors, freehold companies and property businesses on the tax consequences of property transactions.

Before extending leases, we can work alongside your solicitor and professional valuer to establish:

  • how the freehold is owned;
  • whether the company owns it beneficially or as nominee;
  • what valuations are required;
  • whether the company could realise a taxable gain;
  • whether shareholders could receive a taxable distribution;
  • the Capital Gains Tax position of individual leaseholders; and
  • whether SDLT needs to be considered.

If you own a flat with a share of the freehold and your residents’ company is considering extending the leases, take tax advice before the new leases are signed.

A transaction that appears to be free can sometimes have a surprisingly expensive tax consequence.

About the Author

Steve Bicknell FCMA, CGMA is Managing Director of Bicknell Business Advisers Limited, specialising in property taxation, SDLT, Capital Gains Tax and tax planning for landlords, developers and property investors throughout the UK.

Does your business have a CSR strategy?

woman with dreadlocks and man in yellow t shirt sorting clothes standing next to each other

Having a ‘corporate social responsibility (CSR)’ strategy was something that used to be the sole preserve of giant corporations.

But with the social and environmental impacts of business evermore transparent, it’s good practice for every business – both large and small – to have a CSR policy that reflects your core values and goals as an organisation.

1. What is a corporate social responsibility (CSR) strategy?

CSR is a form of self regulation. Your CSR strategy measures the impact your business has on the local community and environment, and will help you focus your efforts on providing charitable support, community interactions and other ways of improving your positive impact.

2. How do you improve your social and environmental impact as a business?

Your CSR strategy helps you proactively improve your company’s social and environmental impacts – so you carry out positive work and make your business into a good global citizen.

This could mean cutting your emissions and carbon footprint as a business. It could mean hiring more local people to boost the economy. Or it could mean working with nearby charities, not-for-profit organisations or social enterprises to support good work in your community.

3. Why should your CSR strategy mirror your organisation’s core values?

As a business, you almost certainly have a set of core values that define how you do business. Your CSR strategy should reflect those core values. This helps you demonstrate the ways that your values, beliefs and long-term goals are ingrained in your long-term business plan.

For example, if ‘thinking greener’ is one of your core values, you need evidence that your CSR strategy is focused on making your operations more sustainable. If ‘community minded’ is a core value, you must be able to show how you’re reaching out to your local community to offer charitable help, funding and support etc.

4. How do you measure your CSR performance?

The key to measuring your CSR performance is to set clear targets for each area of your CSR strategy. By setting clear goals and timelines, you can track the business against these aims and measure your performance over time.

Including your CSR aims and performance in your annual report is a great way to hold yourself to account, while also being transparent and public about your performance.

5. What’s the best way to promote your CSR strategy?

Talking about your CSR goals and performance is an important part of being transparent about the good work you’re doing. But be careful about your wording and resist the temptation to make this a case of self-promotion.

If you run an event with a local charity, blog about it, or post a video from the day, and make sure you give the charity plenty of space to talk. If you’re doing work to help cut your use of single-use plastics, include a short update in your next newsletter, or ask staff for their ideas on how to meet this goal more effectively.

Start thinking about your corporate social responsibility strategy

Having a transparent CSR strategy should be an important goal for any business. Consumers and business clients want to know what their favourite companies are doing to improve the company’s impacts on the outside world.

Understanding the Tax Consequences of s455 Directors Loan: A Guide for UK Business Owners


If you’re a director or shareholder of a UK company, it’s important to understand the tax consequences of s455 Directors Loan. Failure to comply with HMRC regulations can lead to penalties and additional tax liabilities. In this blog post, we will explore the tax implications of s455 Directors Loan, the rate of tax payable, when and how the tax is paid, reclaiming the tax, benefits in kind, board resolutions, bed and breakfasting loans, anti-avoidance rules, relief time period, and including relevant notes in micro accounts.

  1. Understanding s455 Directors Loan:
    S455 Directors Loan refers to money borrowed by a company director or shareholder from their company. If the loan is not repaid within 9 months following the end of the accounting period, it can incur tax implications for both the company and the director.
  2. Rate of Tax Payable:
    The rate of tax payable on s455 Directors Loan is currently set at 33.75% of the outstanding loan amount. This tax is paid by the company, not the individual director or shareholder.CTM61505 – Close companies: loans to participators and arrangements conferring benefit on participator: general – HMRC internal manual – GOV.UK (www.gov.uk)
  3. When is Tax Payable?
    The tax on s455 Directors Loan is typically due at the same time the company’s corporation tax is due – nine months and one day after the end of the accounting period in which the loan was made.
  4. How is Tax Paid?
    Tax payable on s455 Directors Loan is paid by including it as part of the company’s corporation tax liability, which is reported and paid through the Corporation Tax Return (CT600).
  5. Reclaiming the Tax:
    The tax paid on s455 Directors Loan can be reclaimed by the company after the loan has been repaid. LC Forms (hmrc.gov.uk)
  6. Benefit in Kind on Directors Loan:
    If the loan exceeds £10,000, the company may need to report it as a “benefit in kind” for the director. This means that the individual may be subject to personal income tax on the value of the loan unless the Director/Shareholder pays interest on the loan at least at the approved HMRC rate.
  7. Board Resolution for Loans over £10,000:
    To avoid the potential income tax implications of benefit in kind, a board resolution should be implemented authorising the director’s loan. This should be done before the loan is taken or within nine months of the company’s year end. A loan agreement is also recommended.
  8. Bed and Breakfasting Loans:
    To prevent circumventing the 9-month rule, bed and breakfasting occurs when the director repays the loan just before the end of the 9-month period and immediately takes out a new loan. Anti-avoidance rules are in place to discourage this practice. The key rules are the ’30 day rule’ and ‘intentions and arrangements rule’.
  9. Anti-Avoidance Rules:
    HMRC has anti-avoidance rules in place to prevent the abuse of s455 Directors Loan transactions. It is essential to ensure that all loans between directors/shareholders and their companies are conducted fairly and genuinely.
  10. Relief Time Period – 9 Months:
    The relief time period refers to the nine months following the end of a company’s accounting period. If the loan is repaid within this period, the tax paid on s455 Directors Loan can be reclaimed.
  11. Including Notes in Micro Accounts:
    Micro entities are required to prepare and submit detailed notes as part of their financial statements. It is important to include relevant notes regarding any outstanding s455 Directors Loan, as this will provide transparency during the tax assessment process.

Conclusion:
Understanding the tax consequences of s455 Directors Loan is crucial for UK business owners. By addressing the tax liabilities promptly, ensuring compliance with regulations, and seeking professional advice, companies can navigate this complex area of taxation efficiently. Stay informed, keep accurate records, and stay on top of your financial obligations to avoid any unnecessary penalties or additional tax liabilities.

steve@bicknells.net

The UK Autumn Statement 2022

Its official, we are going to be worse off due to inflation at over 10%, energy costs capped at £2500 going up to £3000, interest rates going up. To find out more about the tax changes in the Autumn Statement download our free report.

Click here to download

How do you create a Group using Share Exchange/Swap? Why is it done?

photo of man holding pen

Share for Share exchange is often used when you are re-organising or creating a group and benefits from tax relief.

Basically if you don’t do a share exchange you would need to sell the shares at market value creating both Capital Gains and Stamp Duty costs.

In order to do a Share exchange you must have bona fide commercial reasons for doing it and it can’t be just to avoid tax. So for example you might want to create a group in order to separate trading and investment activities and enable an investment company to obtain mortgage finance (most lenders probably would not lend to a single company doing both trading and investment in the same company as it puts the investment at risk).

Why?

Here is a common scenario, a developer buys a commercial property to develop into residential and sell, but when the project completes the market conditions have changed they want to keep the residential properties and rent them out.

During the development they will have reclaimed VAT and the first grant of residential is Zero Rated, so they get full recovery. An investor would not get this.

So to avoid partial exemption for VAT its best to move to a new company and there are bona fide Commercial Reasons too as previously noted.

Although the reclassification to investment will create a profit and tax charge a group structure will provide Group SDLT relief. See these blogs for details.

What if you move a Property from Fixed Asset Investment to Trading Stock or Vice Versa? Appropriations and Reclassifaction – Steve J Bicknell Tel 01202 025252

Do you pay SDLT on Properties Transfers within a Group? – Steve J Bicknell Tel 01202 025252

How?

The process basically has 4 stages.

Stage 1 – Form the new companies

Assuming you are now creating a new Holding Company with a New Investment Company, these need to be formed first.

Stage 2 – HMRC Clearance

Its not mandatory but it is best practice How to apply for clearance or approval of a transaction from HMRC – GOV.UK (www.gov.uk)

To get clearance you need to write a letter to HMRC setting out all the facts, the group structure and the commercial reasons, typically the letter is 6 to 10 pages long.

You can request advance clearances by sending an email to reconstructions@hmrc.gov.uk. You do not need to send a paper copy.

Attachments should be no larger than 2MB. Do not send self-extracting zip files as HMRC software will block them.

If possible we would like to reply by email, but we need your permission to do so by including the following statement:

‘I confirm that our client understands and accepts the risks associated with email and that they are happy for you to send information concerning their business or personal details to us by email. I also confirm that HMRC can send emails to the following address (or addresses)….’

If you’re making the application on behalf of yourself or your company adapt this wording as necessary.

Stage 3 – The Contract

This is normally done by a solicitor.

The contract deals with the acquiring company and the shareholders of the target company under which the shares are to be acquired with the consideration being shares in the acquiring company.

Stage 4 – Stamp Duty Relief

As the acquiring company is paying consideration for the shares (the issue of its own shares), then the transaction is subject to Stamp Duty. However, relief can be claimed under s77 FA 1986 if the conditions are met and the anti-avoidance rule of s77A FA 1986 does not apply. HMRC guidance is at STSM042000 starting at STSM042410. After the conditions have been checked and a claim prepared, see “How to Claim Relief” on GOV.UK. The claim needs to be made within 30 days of the contract date and, as HMRC outline, various information will need to be attached to the e-mail claim including the stock transfer form.

steve@bicknells.net

Spring Statement 2022

A summary of the Spring Statement 2022 is now available – click here

We have produced this newsletter to cover the main issues that are most likely to be of interest to you. You will also find useful commentaries to help you understand how the proposed changes may affect you personally. In addition, we have included a detailed calendar of the most important dates for 2022/23 that will help you with tax planning ahead of time. If you have any questions concerning the issues covered in this summary, or would like advice on the best possible course of action in a particular area, please contact us – click here

HMRC Post-transaction valuation checks (CG34) and why you need one

Post transactions checks are used in relation to capital gains, they can be used by individuals or companies.

Its a free service offered by HMRC.

HMRC state

If we agree your valuations we’ll not question your use of those valuations in your return, unless there are any important facts affecting the valuations that you’ve not told us about.

But HMRC say it could take at least 3 months to check the valuation.

You can only request a Post Transaction Valuation Check:

  • after disposals relevant to Capital Gains Tax
  • before the date you must file your Self Assessment tax return

Here is a link to the form

CG34 Post-transaction valuation checks for capital gains (publishing.service.gov.uk)

Why are they needed?

There are situation where transactions are not ‘arms length’ in other words they are between connected parties.

For example if you have a development company and sell property to related company.

You can use the CG34 for

  • Shares
  • Goodwill
  • Land
  • Other Assets

The CG34 is not mandatory, you don’t have to get a post valuation check, but if you do, you will gain protection against HMRC questioning your valuation (assuming they agree with you CG34 submission).

You will need to submit supporting documents for example a independent valuation report to justify the value.

For Land valuations you will also need

  • Copy leases
  • Tenancy Agreements
  • Plans of undeveloped land

Where do you send the form?

Taxpayers dealt with by HMRC’s High Net Worth Units, or Public Department 1 should send the completed CG34 to those offices.

Those dealt with by Specialist Trust Offices should send their forms to:

Specialist PT Trusts and Estates Trusts
SO842
Ferrers House
Castle Meadow
Nottingham
NG2 1BB

Other individuals, partnerships and personal representatives should send the completed form direct to:

PAYE and Self Assessment
HM Revenue and Customs
BX9 1AS

Companies should send to the office dealing with the company corporation tax affairs or if they do not have one, to:

Corporation Tax Services
HM Revenue and Customs
BX9 1AX

steve@bicknells.net

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

Does a Company pay tax if it receives a Dividend?

We generally recommend creating a holding company to hold property investing companies as it helps to centralise management and can give guarantees to lenders.

Many business owners have a concern that if the holding company receives dividends from subsidiaries that they will be double taxed, once in the subsidiary (before paying dividends) and then on the profit in the holding company when in receives the investment income (dividends). This would be madness!

Dividends paid to UK Holding Companies are normally exempt from Corporation Tax.

https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm15150

A distribution made by a UK resident company and received by a UK resident company is generally not included in the recipient company’s CT profits. Similarly, such a distribution received by a non-UK resident company trading through a UK permanent establishment is not generally included in the CT profits of that permanent establishment. However, the way in which distributions received by companies are treated for tax purposes changed from 1 July 2009:

  • Until 1 July 2009, ICTA88/S208 (and for a brief period CTA09/S1285) provided that corporation tax was not chargeable on distributions from UK resident companies.
  • From 1 July 2009, the way in which distributions from UK resident companies are taxed was aligned with the treatment of distributions from non-UK companies in CTA09/S931A. (Previously, distributions from non-UK resident companies were charged to corporation tax as income from foreign possessions under ICTA88/S18, that is, under Case V of Schedule D). CTA09/S931A charges distributions from UK and non-UK resident companies to corporation tax, but then exempts these from charge in most cases. In practice, this means that most distributions – UK and non-UK sourced – are not chargeable to corporation tax unless these form part of avoidance arrangements.

steve@bicknells.net

DIY Corporation Tax Filing – are you excluded?

There are a lot of companies that can’t file using the HMRC online service…

Who can’t use the service

You won’t be able to use the HMRC free service if any of the following apply:

  • your accounts require an audit or have been audited
  • your company turnover is above £632,000 per year
  • your charity turnover is above £6.5 million per year
  • your company must pay its Corporation Tax in instalments
  • your company is part of a group
  • your company is not registered in the UK
  • your company is in liquidation or receivership
  • your company is an insurance company – not including independent insurance brokers
  • your company is an investment company
  • your company is a credit union
  • your company is a commercial property management company
  • the Corporation Tax accounting period for the return is covered by more than one set of statutory accounts
  • you need to claim a repayment of a loan to a participator (for example, a director’s loan), more than 9 months after the end of the accounting period

If you can’t use HMRC’s free online service, you can use commercial software to submit your online return.

As we are moving towards Making Tax Digital, how is this going to enable businesses to file online?

Clearly they could buy third party software, such as BTC https://www.btcsoftware.co.uk/

I use BTC and this its brilliant, there are of course many other products available.

But as Tax is complicated, despite a constant effort to simplify it (which so far hasn’t really worked), surely HMRC are encouraging companies to turn to tax agents for help?

I thought the strategy was to reduce taxpayer reliance on Tax Agents?

steve@bicknells.net