What is trading and non-trading for Corporation Tax purposes

Understanding whether you’re legally required to pay tax is key to avoiding unexpected bills. However, it can be more confusing than you’d expect to understand trading and non-trading statuses. 

HMRC considers a company to be trading for Corporation Tax purposes if it is deemed to be conducting general business activities, trading or receiving income. If your company does not meet these criteria, it is considered “dormant”.

Some unincorporated organisations (such as sports clubs) may be considered dormant even if they are operating and are only liable to pay below £100 in corporation tax in one year.

In this article, we’ll explore everything you need to know about whether your corporation needs to pay, and how you can make the payment.

Active company

Your company will be considered an active company and liable for Corporation Tax if it:

• Carries out business activities via general trade or other professional activities
• Purchases and sells goods or assets with the intention to make a profit (or surplus)
• Provides the services that compose its primary trade
• Earns interest on assets
• Manages investments it already has
• Receives income from other sources

You need to be aware that for Corporation Tax purposes, HMRC has different criteria than those used in other areas of tax such as VAT.

Their definition may also vary from guides on audits from bodies such as the Accounting Standards Board or the International Financial Reporting Standards, so be sure to fully explore the corporation tax status of your company based on HMRC’s specific guidelines.

What must happen if an entity is active?

If your company qualifies as an active company for corporation tax purposes you must notify HMRC within 3 months of your tax accounting period beginning. It’s best to do this as soon as possible, so you can pay your corporation tax on time and avoid any late penalties.

To do this, you will register for Corporation Tax through the HMRC portal, which will require a Government Gateway ID. You must also be registered with Companies House to be a formally recognised business.

Unincorporated associations needing to register and complete a company tax return will need to register in writing. This can also be done by limited companies not wishing to make the Corporation Tax registration digitally.

To register in writing, you must include the following information in your letter:

• Company registration number and name of the company
• The date that the tax accounting period began for said company
• The date that you plan to prepare your accounts (for Corporation Tax purposes)
• The company’s UK business address
• The type of business you intend to conduct
• Names and addresses of the company directors
• If the business is a member of a collective of companies, the parent company’s name and address
• If the company is subject to PAYE Income Tax Regulations 2003, the date that it was first obliged to do so

The letter must be signed by either a company director or secretary and must also contain a declaration that all information provided for corporation tax purposes is correct to the best of your knowledge.

Letters are to be sent to:

• Corporation Tax Services
• HM Revenue and Customs
• BX9 1AX
• United Kingdom

If you require assistance with registering for Corporation Tax, Sleek can help. Get in touch with one of our advisors to find out more.

Non-trading company

If your business is deemed to be a dormant company for corporation tax purposes it will not be obligated to make a company tax return. There are numerous circumstances where this may be the case, and you can learn more about those here. 

If you don’t receive communications from HMRC indicating that they think your company is dormant, you will still need to let Companies House know or you could incur a fine. You can use this service to inform HMRC. 

Want some help with notifying HMRC that your company is dormant? We can do this for you at a small price, please get in touch to find out more.

Trying to open a company in the UK as a non resident? Check out our article “How to register a non-resident company for corporation tax”.

What is a non-trading company?

For Corporation Tax purposes a non-trading company is one that is no longer doing business and generating chargeable gains.

What makes your company dormant or not active?

In the eyes of HMRC, a dormant company is one that has not yet started trading. This is determined by whether or not you have carried out business activities such as providing a service or buying and selling goods for profit. 

There are exceptions to this rule and HMRC does allow for what’s known as pre-trading activities and pre-trading expenditures without incurring Corporation Tax liabilities. Pre-trading activities are actions considered to be necessary in the setting up of the company. These include writing business plans and negotiating contracts.

If you’ve previously traded and paid corporation tax in the past but have now stopped trading, you will no longer be liable to pay corporation tax (providing you’re no longer carrying out business activities). You should notify Companies House immediately when you stop trading otherwise you can incur financial penalties for late submissions.

Non-trading company for corporation tax

For purely corporation tax purposes, HMRC deems a dormant company as a company that is “not active, not liable for corporation tax or not within the charge to corporation tax”.

Dormancy in this instance refers to:

• Start-up companies that have not yet started trading
• Companies that will never trade as they were formed exclusively to hold an asset such as IP or real estate
• Shell companies owned by a company formation agent solely to sell on
• Defunct businesses scheduled to be removed from the companies house register

Conclusion

Tax planning and ensuring your company is compliant can be a minefield.

The best way to make sure your company is doing everything it needs to on the tax front is to get in touch with an accountant who is a specialist in Corporation Tax.

If you’re unsure about any aspect of your taxes or need assistance with financial tax planning, consulting our tax advisors for corporate tax advice will save you time, money, and potential headaches. To provide you with an efficient and seamless tax process, Sleek has the right set of solutions for you!

Accountants at Sleek can help ensure that your accounts are in order and up-to-date, so you can focus on your business. Our experts offer a variety of services, and can provide you with information on when your tax payments are due and what allowances you may be eligible for to help offset your total corporate tax bill.

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