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Let’s say your current business has been having a tough time and you want to change it to something new, can you carry forward the trading losses.
Probably not look at this example from BIM85050
For example, a publican who had owned a pub in Leeds for many years sold it and bought another in York. Although in the everyday sense the trader remains a publican throughout, the York pub is not the same trade as the Leeds pub.
Tax law requires any losses (including Corporation Tax Losses) carried forward to be offset against future trading profits from the same trade.
One solution to this may be Group Relief, companies which are part of the same Group can surrender losses within the Group.
The rules about which trading losses and other amounts may be surrendered are described at CTM80110. The company that transfers the losses, etc, is called the ‘surrendering company’. The company that claims the losses, etc, is called the ‘claimant company’.
Trading losses, excess capital allowances and non-trading deficits on loan relationships may be surrendered in full. This is irrespective of whether the surrendering company has other profits against which the loss etc might have been, but has not been, set off.
Alternatively it may be possible for the loss making business to sell services to the new business and in doing so reduce its loss.
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. But HMRC and Companies House use the term dormant in slightly different ways.
For 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’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
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
This definition of being active for Corporation Tax purposes is not necessarily the same as that used by HMRC in relation to other tax areas such as VAT, or by other government agencies such as Companies House.
If your limited company has been dormant but is now active, you must tell HMRC within three months of starting your tax accounting period. The best way to do this is to use HMRC’s online registration service.
HMRC have further details on this link
To contact HMRC you will need your Company UTR number and the 3 digit tax office number, then you can use this link to find out contact details for you Corporation Tax Office
When you call, Option 3 is for Dormant Companies and Option 4 is for Active Companies.
Then you will need to write to HMRC to advise them of the change in activity status.
Companies House still require Annual Returns and Annual Accounts even if the company is dormant, but these are obviously easy as there are no changes from the previous year.
I am pleased to present you with the main points from yesterday’s budget.
1). Employer’s will be given a refund on the first £2,000 of national insurance they pay.
Comment: This is a real help because it will take £2k off the payroll bill for existing small employers with less than 250 employees, and removes the most common reason that why hear as to why clients are reluctant to take on their first employee.
In summary you could take on:
• one £22k employee, save the £2k NI and reduce your corporation tax bill by £4,400
• four trainees on minimum wage, save the £2k NI and reduce your corporation tax bill by £9,700
2). Single rate of 20% corporation tax for the first time since 1973.
Comment: Clients who trade as a limited company with the owners on the payroll continue to pay significantly less corporation tax than the income tax that would otherwise be due by the same business operating as a sole trader.
The difference for a business with an income of £30k is a £1,961 reduction to their 2014-15 tax bill.
3). The rate at which people start paying income tax rises to £10,500 from April 2015 (the allowance was already increased to £10,000 from next month in last year’s budget)
Comment: When the government came to power the starting rate for tax in 2010-11 was £6,475. This move has done much to not only take a whole bracket of people out of tax completely, and also reduces the amount those who do pay tax by £805 per year.
4). The point at which higher rate (40%) tax applies is increased to £41,865 from next month and £42,285 from April next year.
Comment Clients who are high rate earners will see a modest £83 reduction to their tax bill this year and £167 next year. For those clients who operate as a limited company the extra tax free dividend they can take will result in an additional tax saving or £188 per year.
5). The Help to Buy scheme where the government offers a 20% deposit to a first time buyer purchasing a new house costing less than £600k, will continue until 2020.
The purchaser is asked to raise a 5% deposit with the government providing a 20% loan which is interest free for the first 5 years, with the option to defer repaying it until the owner sells.
Comment: We have more clients in the construction industry than all the other sectors combined so this is clearly welcome news for them as well as the bigger firms where shares in Persimmon rose by 6% following the announcement, and those in Bovis and Taylor Wimpey by 4% and 3.4% respectively.
6). Inheritance tax will be scrapped for members of the emergency services
Comment: Useful if your estate is worth more than £325,000
7). Cash and Stock / Shares ISA’s to be merged from July with a new tax free allowance of £15,000 per year (currently £5,760 for a cash ISA).
Comment: While this is welcome news for savers the interest rates on ISA’s remain so low (1.5% for instant access / 2.5% for fixed three year deals) that it is only worth putting significant money into them if you have already paid off your mortgage where the equivalent interest savings are considerably greater.
8). A new saving scheme exclusively for those over 65 (The Pensioners Bond) will be introduced with interest rates of 2.8% for instant access & 4% if fixing for three years.
9). Tax breaks on businesses investing in capital items will be increased from £250k to £500k.
Comment: This costs the government £2bn so it is right that it is a significant measure in encouraging our clients to invest in their business for the future. Capital items can include new plant, machinery, equipment, premises renovations, commercial vehicles and cars with a CO2 rating of under 95g/km.
10). The current 10% income tax band on savings income up to £2,790 will be replaced with a new tax free limit of £5,000.
Comment: We fail to see how this provides any help to savers because if you have any other income then you lose the entitlement to claim reduced income tax on your savings income. The only positive is that in the rare instance where the saver has no other income (?) they can now apply to their bank to receive the interest without the usual 20% deduction of tax, therefore saving them the need to file a tax return.
11). Small Business Rate Relief has been extended to April 2018; under the scheme small businesses with a rateable value of £6,000 or less can get 100% relief, the relief is scaled down to zero on rateable values of £12,000 and there is a lower multiplier on rates between £12,001 and £17,999.
Comment: this is a welcome help for clients with their own business premises and those thinking of taking the step up.
12). Pensions Reform
At the moment, anyone who saves a decent sum into a defined contribution pension (one where your pension depends on how much your savings are worth) can cash in 25% of the fund value from the age of 55 but then usually has to buy an annuity with the remaining 75% lump sum when they come to actually retire. An annuity is effectively a bond which provides a retirement income for the rest of your life.
Mr Osborne announced a plan for a new law that will get rid of the requirement to buy an annuity entirely. Instead, people will be able to take the lump sum as cash and organise their own spending.
It is important to note that anyone who already receives an annuity will not be able to change that existing arrangement under these planned new rules. Also people who are in defined benefit or final salary pension schemes will not see any change.
Comment: For individuals with modest pension funds these new rules create a new way of accessing their money in full when they retire. But since the proposal is to levy income tax on the value of any lump sum you take this would mean anything you receive during a single year that is in excess of £41,865 would be subject to 40% tax…. For this reason some spreading out of the draw down to utilise your annual basic rate allowances will still be required, and it may well be that this is best achieved through the use of an annuity still.
13). Parents paying 80% of childcare costs of up to £10,000 per child, aged up to 12, to a registered provider will get the remaining 20% from the government tax-free from September 2015.
Comment: The government is hoping that this will go some way to appeasing those earning more than £50k per year who lost their entitlement to state child benefit last year.
Switch Accounting Ltd
Basically if your company makes a loss you carry it forward.
The amount of trading loss available to be carried forward is the loss sustained less any loss relieved in the current year or surrendered as group relief.
Carry forward a corporation tax loss is automatic, therefore as no claim is required there is no time limit.
The legislative reference for a trading loss carried forward is: CTA 2010 s45) [old reference ICTA 1988 s393(1)].
You can also make a claim to carry a loss back 12 months.
The legislative reference for carry back loss relief is: CTA 2010 s37(s)(b)(6)(8) and s38 [old reference ICTA 1988 s393A(1)(b)(2)-(2C)].
But there is another option, to help improve your cash flow, lets say you have been making profits and you have just come to the end of your accounting period, the next few months are going to be tough and you will make a loss. If you change your year end by extending it or having a shorter period you could help your cash flow.
Corporation Tax is payable 9 months and 1 day after your year end, so you will have a return for 12 months and have tax to pay but if you had a 6 month return to follow it you could reduce the time before you claim relief for the loss.
If you extended your accounting period to 18 months the figures might even look better for credit rating.
You can shorten as much as you want but not beyond the start date of the accounting period being changed.
You can only extend once every 5 years.
See the Companies House Checklist for details
The small companies rate of Corporation Tax is 20% compared to main rate of 23% (2013/14). The small company rate is applied if your profits are below £300k, however, if you have associate companies, the £300k is spread between them equally.
For the purposes of CTA10/S25 (4), formerly ICTA88/S13 (4), a company is an associated company of another at a given time if at that time:
- one of the companies has control of the other, or
- both of the companies are under the control of the same person or persons
But what some businesses forget is that if you have a subsidiary that has become dormant it stops being associated
an associated company which has not carried on any trade or business at any time during the accounting period is disregarded – if it is an associated company for part only of the accounting period, the rule applies to any time during that part.
Lets start with a typical scenario:
- Mr Smith has been running a small garage for a few years
- he decides to incorporate his business and sets up Smiths Garage Limited with himself as the sole director and shareholder
- he transfers the goodwill of the business and its other assets and liabilities to Smiths Garage Limited but does not claim incorporation tax relief under Taxation of Chargeable Gains Act (TCGA) 1992, s162, nor does he claim hold-over relief under TCGA s162
- at the time of incorporation, the goodwill of the business is valued at £100,000
- Mr Smith makes a chargeable gain on the transfer of the goodwill, which is deemed to be at market value, of £100,000 which, after deducting the annual CGT exemption (£10,900 2013-14), will be taxable at 10% due to the availability of entrepreneur’s relief
- the company will pay Mr Smith £100,000 for the acquisition of goodwill and this is done by way of a credit to Mr Smiths director’s loan account. Mr Smith is able to draw down on this account without any further tax charges.
In addition Mr Smith started his Sole Trader business after the 1st April 2002 so he can claim a corporation tax deduction for amortisation of the goodwill in the company accounts. Small Companies pay Corporation Tax at 20%, so being able to deduct Goodwill on £100,000 will save £20,000 in Corporation Tax.
However, please bear the following in mind:
- If the business started before 1st April 2002, Corporation Tax Act 2009 s895 prevents the company from claiming a deduction against corporation tax, also refer to HMRC Spotlight 1: Goodwill – companies acquiring businesses carried on prior to 1 April 2002 by a related party
- Where a trader transfers his business to a limited company of which he is a ‘substantial shareholder’, the parties are treated as ‘related parties’ and the transfer must be at market value, but you can ask HMRC to carryout a post transaction valuation check by submitting form CG34
- Goodwill relating to personal services is not normally considered to have a market value as it can not be transferred
- In general it is expected that intangibles will have a useful life of no more than 20 years
- Get professional advice to help you to prepare the valuation, disclose the capital gain and claim the tax relief