Basic Corporation Tax

Basic Corporation Tax

This blog provides an overview of basic corporation tax. It explains how being a trading or non trading (dormant) company or organisation affects your corporation tax reporting requirements. It is based on information obtained from the following HMRC web site:-

Overview of Basic Corporation Tax

HMRC may consider your company or organisation to be “active” for Corporation Tax purposes when it is, for example, carrying on business activity, trading or receiving income.

In some circumstances, HMRC would not consider your company or organisation active for Corporation Tax purposes. In this case, your company or organisation is “dormant”, (i.e. not active or not trading).

HMRC may also deem your unincorporated organisation, (such as a members’ club), dormant for Corporation Tax purposes if it is active or trading but it is due to pay Corporation Tax of less than £100 for an accounting period.

What is active for Corporation Tax purposes?

Your company or organisation is considered to be active for corporation tax purposes when:

  • 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

This definition of being active for basic Corporation Tax purposes is not necessarily the same as that used by HMRC in relation to other taxes (such as VAT) or by other government agencies (e.g. Companies House).

Telling HMRC your company or organisation is now active

You must tell HMRC within 3 months of starting your tax accounting period if your limited company is within the charge of Corporation Tax and is now active. The best way to do this is to use HMRC’s online registration service.

You can also register for Corporation Tax in writing. 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 company’s nature of the business being carried out

You can also register for Corporation Tax in writing. Your letter must include:

  • the name and home address of each director of the company
  • 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 has taken over another business)
  • 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

What is not active for Corporation Tax purposes?

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

There are a number of circumstances where HMRC would generally consider your company or organisation not to be active for Corporation Tax purposes when:

  • It has not yet started trading
  • It has previously traded but has stopped trading

When your company or organisation has not yet started trading

HMRC considers that your company or organisation has not yet become active or started trading if it has not yet engaged in anybusiness 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).

Your newly-formed company or organisation may not be active for  Corporation Tax purposes. However, you may still carry out activities (known as ‘pre-trading activities’) or incur costs (known as ‘pre-trading expenditure’) before you officially open your business without HMRC deeming that you have started trading.

Activities or expenditure to do with setting up a business that are not considered trading by HMRC for Corporation Tax purposes include:

  • preliminary activities such as writing a business plan or negotiating contracts
  • preliminary expenditure such as incurring costs with a view to deciding whether to start a business

When your company or organisation has previously traded but has stopped trading

  • HMRC generally considers a company or organisation to be dormant for Corporation Tax purposes if it’s no longer carrying out any business activity.
  • If your business is a company, you should normally already have notified Companies House that your company is dormant.

What does dormant for Corporation Tax mean?

Dormant is a term that HMRC and Companies House use for a company or organisation that is not active, trading or carrying on business activity. However HMRC and Companies House use the term dormant in slightly different ways.

For basic 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 is 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 is no longer trading and destined to be removed from the Companies Register

When HMRC will treat clubs and unincorporated organisations as dormant

HMRC may treat your club or unincorporated organisation as dormant for Corporation Tax purposes if it is 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 is 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 not treat your organisation as dormant if it is a:

  • privately owned club run by the members as a commercial enterprise for personal profit
  • housing association or you’re 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

For further information about basic corporation tax, please contact Stallion Accountancy Services.

About the author...

George Greer is an experienced ACCA qualified Business Owner with a demonstrated history of working in the accounting industry. He is skilled in Accounts and Finance Management, Budgeting and Business Planning with excellent knowledge of Sage and Xero Products. Strong professional with a BSc focused in Business Computing Systems from City University London.

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