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Dormant Company "entitled" to receive income

Can a company direct that its income is paid to a parent company to remain dormant

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This is not an attempt to save tax, just avoid admin and unnecessary complications

K Ltd is 100% owned by C Ltd (both are UK registered)

K owns a building and is entitled to receive rents (approx £20K). It's balance sheet is nil as it owns a £200K property, but owes £200K to C

C owns other properties and receives mainly rental income with a small amount (approx £15K) of income from consultancy.

There are no VAT issues as neither company is registered and all but the £15K of consultancy would be exempt anyway.

For simplicity, what I would like to do is….

Instruct the leaseholders in K's building to pay the Ground Rent to the parent company C.   K would then be dormant. C would account for the income as part of its turnover in the usual way.

If that isn't permitted, could I………

Offset the £20K income to K with a £20K management charge from C so that K makes no profit. Then the management charge would be part of C's turnover and accounted for in the usual way. I am less keen on this as VAT exempt rental income to K has now become a potentially VATable management charge although still below the threshold (and I could register for Group VAT and avoid any issues)

What I want to avoid is any requirement to apportion costs between the 2 companies as it is just a lot of admin (for me and HMRC) with no effect on the combined tax bill.

All advice gratefully received!

 

Replies (10)

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By williams lester accountants
24th Dec 2021 07:44

Advice - get an accountant!

Thanks (4)
Replying to williams lester accountants:
RLI
By lionofludesch
24th Dec 2021 13:04

williams lester accountants wrote:

Advice - get an accountant!

.... after getting a lawyer.

Thanks (3)
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By paul.benny
24th Dec 2021 08:33

+1

It's hardly a lot of admin. You have to keep track of the rental income whether it goes to K or C.

I think K is below the threshold for webfiling directly at Companies House, which prepares the statutory accounts based on your inputs. There is also an option to complete the tax return at the same time. If you have your records in good order, the whole thing is likely to take you 10-15 minutes.

Thanks (0)
Stepurhan
By stepurhan
24th Dec 2021 08:45

Best way to avoid complications is not to have a complicated setup in the first place. How many other ways have you made life difficult for yourself because you didn't think things through?

Neither of your suggested approaches will make K dormant. K is entitled (not "entitled") to the income based on the information given. Best to take some proper advice before you make an already messy situation worse.

Thanks (2)
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By Tax Dragon
24th Dec 2021 09:27

Although you have tagged corporation tax, there's also an accounting question. (You may have conflated accounting dormant and tax dormant, but they are different things.)

I think Paul and stepurhan have addressed the accounting question. (Given their response, the tax answer becomes irrelevant, it seems to me. However...) ...the only comparable tax situation I can think of is when trustees mandate income to beneficiaries. This can shift responsibility for the income tax to the beneficiaries. But the underlying legal position there is that the beneficiaries anyway have a right to the income, with or without the mandate. So "comparable"?… probably not, on reflection.

Btw, I struggle to think of why the structure has been set up that way, other than a commercial reason, and if your suggestion 'worked' I suspect it would undermine that.

Thanks (1)
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By Paul Crowley
24th Dec 2021 09:51

You clearly need accounting advice, as if you genuinely think anything in the question is a clever idea then chances are you are making so many other bad decisions as well

Why put a building in a company comes directly to mind?
That decision was volunteering for extra tax
Why double the problems by having an extra company
Why then add more issues in by making one company a subsidiary of another
What special risk is there that needed a new company just for one property?

You have been doing this for years. Seriously it is now time to get an accountant whilst all years are open and can be corrected

This arrangement is no trouble at all for HMRC
Just you

Thanks (1)
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By Paul Crowley
24th Dec 2021 10:30

Have you considered the corporation tax increase on profits exceeding £50,000?
That is happening quite soon
Get the accountant to do some tax projections

https://www.rjp.co.uk/planning-ahead-for-the-corporation-tax-increase-in...

The effect will be tax at 26.5% for profits exceeding £25,000 for the company receiving the £15,000 consultancy, based on current position

Thanks (0)
RLI
By lionofludesch
24th Dec 2021 13:07

If you can't be bothered to prepare two sets of accounts, why don't you transfer the property to C ?

If you've got a valid reason for keeping the property owned by K, I'd strongly suggest that you don't mess about with short-cuts.

But - it's up to you.

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By Chris7
24th Dec 2021 13:25

Thank you to those who have made helpful contributions. It appears someone else asked a very similar question and the answer is basically to pay the CT in subsidiary and then transfer the profit to the parent as a dividend which is outside of CT in the hands of the parent company

https://www.accountingweb.co.uk/any-answers/treatment-of-dividend-from-s...

The reason for keeping the property in a separate subsidiary relates to potential building related issues linked to EWS1. I am not aware of any, but nor do I want to bring down the parent company if the government decide to make the freeholder liable (retrospectively) for any building defects left by the developer.

I had also considered the increase in CT over £50K, but at present the excess is going into SIPPs which reduces profits and eventually I guess we will just pay the tax!

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Replying to Chris7:
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By Hugo Fair
24th Dec 2021 14:45

I think you need to have an objective and stick to it.

OP: "What I want to avoid is any requirement to apportion costs between the 2 companies as it is just a lot of admin (for me and HMRC) with no effect on the combined tax bill"
... but now you want to avoid any liabilities "if the government decide to make the freeholder liable (retrospectively) for any building defects left by the developer."

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