Is a company "legally" trading when it earns no income

Is a company "legally" trading when it earns no...

Didn't find your answer?

One-man company, now at year 20, has accumulated large bank balance over time, now wishing to remain alive for couple of years in order to distribute this large surplus to single shareholder ... but, the company, although earning ZERO trading income, is in receipt of investment income on business bond and company bank balance, and currently incurring both director's salary costs, as well as admin costs servicing old clients, tying up loose ends, looking for more work, etc. .. but without earning any trading income.

The joint online web-filing offering from HMRC & Companies House doesn't allow a company with zero trading income to be anything other than dormant, in which case it can't incur losses to be carried back against earlier profits. So what to do? Can a company incur losses (which can be carried back against earlier profits) without earning any trading income? Or does a company have to "actively" trade in order to incur "allowable" losses?

I had thought of fudging this by putting in £1 fictitious turnover ........ what are your collective thoughts on this?

Thanks

Replies (8)

Please login or register to join the discussion.

avatar
By the_Poacher
11th Aug 2014 10:38

Try again
Previous posts on Aweb suggest that you can file with the joint filing product. Have a search through the forum and look for how you do it

Thanks (0)
Replying to carnmores:
avatar
By KH
11th Aug 2014 10:49

Not quite the answer I was looking for, but thanks anyway...

I wasn't actually looking for that type of answer, but rather whether losses incurred by a company for the last 2 to 3 years of its existence can be carried back against earlier profits, even when the only business expenditure is things like director's salaries, general admin, etc, and during said 2 to 3 final years no trading income is being reported.

Thanks (0)
Stepurhan
By stepurhan
11th Aug 2014 10:53

Looking for more work

If the company is looking for more work, then it is technically still trading. The fact that it is unsuccessful in acquiring new work should not be a bar to this.

The problem you have is in proving that the company is looking for more work. If it is just a sham to try to create allowable losses then HMRC will come down hard and heavy if it attracts their attention. Is your client genuinely looking for more work and, if so, how? If you can provide evidence of the search for more work (advertising, etc) then you have a potential case. Actually getting more work would be better. You don't indicate the trade, but can small jobs been taken on to keep the trade ticking over?

Thanks (0)
Replying to Mpgolf:
avatar
By KH
11th Aug 2014 11:29

Thanks ... yes, proof business activities is the problem

Thanks for that last reply stepurhan ... your thoughts on the matter are exactly those which are worrying me ... proof of business activities is a problem since the only "proper" receipts are for transport costs, stationery, business insurance, etc .... the company's work all came about via word of mouth, so no advertising costs etc .... business was IT, by the way.

The workaround for HMRC's/Companies House's flawed online software is not the problem .... it is just whether sizeable director's fees, plus accounting fees, admin costs etc, amounting in total to c. £15k can be carried back as a loss against previous years' profits when there was zero trading income in this "final" year. Certainly the company can't be called dormant due to large changes in its bank balance, etc., and also due to receiving sizeable investment income. But the allowability of the losses is a problem

Thanks (0)
pic
By jndavs
11th Aug 2014 14:12

Why 'a couple of years'?

Is this simply to distribute the large surplus in a tax efficient manner?

Thanks (0)
avatar
By Paul Soper
11th Aug 2014 14:27

When did trading cease?

If the company has ceased trading then very few expenses incurred after the date of cessation will be able to be carried back to earlier years.  The company will not be dormant as it still has sources of income but as an investment company, which is what it has now become, there is no loss relief.  Only losses incurred prior to the date of cessation of trade can be relieved as such.  What you will have are excess management expenses which can be carried forward.

Remember too that a company with a large cash surplus could distribute this by way of dividend, year by year, even it is a dormant company to take advantage of the lower IT rate - if entrepreneurs' relief is not available the effective rate on a dividend at 25% is less than the effective rate on a gain, 28%, if the annual exemption limit is exceeded, for a 40% taxpayer.

Thanks (0)
Teignmouth
By Paul Scholes
11th Aug 2014 17:04

Evidence

I've had a few of these over the years and, in reality, if all the client is doing is biding his/her time until distribution, then Paul's posting sums it up perfectly, it has become an investment vehicle.

The question I always ask clients in this sort of position is, "if more work or another client turned up at the door, would you turn it/them away?"  

If no, and they really are servicing old clients and looking for work, then get them to record phone calls, emails and other things they do, day to day, to keep the possibility of new work alive, ie in line with stepurhan's post.  

If yes, then they have answered your question.

 

Thanks (0)
avatar
By KH
12th Aug 2014 11:06

Thanks for all your posts

Thanks for taking the time to reply ... yes, the company is staying alive purely to distribute large surplus is tax-efficient manner, and the sole director/shareholder is now advertising for more work ... so we'll see what transpires and, in the meantime, carry the losses of this year forward to next year, just in case the director does manage to get some more work, or, at the very least, incur advertising expenditure in a genuine attempt to bring in extra work (which I think she will). By the way, next year is actually this current year starting 1st July, and this will be the last year the company is in existence (two dividends of c.£40k each, one in this current fiscal year, and one in next fiscal year, will do the trick).

Thanks (0)