You formed a company in March with the intention of beginning trade immediately. However, this was delayed because of coronavirus. Do you need to notify HMRC and what effect will the delay have on the company’s tax returns?

Accounting periods and tax returns

It’s quite usual for companies to be formed but not begin business immediately. Often the gap is no more than a few days but sometimes it’s far longer. This can and does cause confusion about what you should tell HMRC and how it affects the corporation tax (CT) position. The key point to remember is that while accounts for CT purposes and returns are related, the requirement to submit each is different.

When are accounts required?

HMRC only requires accounts for periods when your company is “active”. For example where it:

  • has business activity such as a trade even if it hasn’t made any sales
  • has a bank etc. account which generates interest, even if none has been received yet
  • manages investments; or
  • receives any other income.

Example. Acom was formed on 1 March 2020 and opened two bank accounts on 10 March: a current account and an interest-paying deposit account. A CT accounting period started on 10 March. Had it only opened the current account (non-interest paying) and had no other source of income or a trade, the CT accounting period would not have begun until later.

When is a CT return required?

You only need to submit a CT return for your company if either:

  • a CT accounting period exists; or
  • HMRC has issued a notice asking for one – even if the company is inactive.

A company is inactive even if you’re preparing for it to trade and incurring expenses. HMRC treats the company as “dormant” for CT purposes. Note that Companies House (CH) has a different definition of dormant and it would consider your company as active if it was incurring expenditure but doing nothing else. CH expects you to submit “active” accounts for such periods.

HMRC procedure

CH notifies HMRC when a company is formed. HMRC then issues a notice to file a CT return for the twelve-month period starting on the date the company was formed. As a CT accounting or return period can’t be longer than twelve months, if you change your company’s accounting date it will create a new accounting and CT return period.

Example. Acom, from our earlier example, changed its accounting date to 31 March. This means it now has an accounting period running from 10 March 2020 to 9 March 2021 and one starting on 10 March 2021 and ending on 31 March 2021. It must submit a CT return for each of those periods.

Trap. A CT return is still required for the dormant period from 1 March 2020 to the date that the first CT accounting period began (10 March 2020). Where the period is short, HMRC will usually (but not necessarily) forego the CT return.

Tip. If HMRC issues a notice to file a CT return for a new company that’s dormant for a long time (more than a week or two) before a CT accounting period begins, don’t assume HMRC will forego a return for the period. This can result in a fine. We recommend you explain the position to HMRC and ask if it still requires a return for the dormant period. Unless it tells you it doesn’t submit a return to avoid any chance of a fine.

HMRC usually asks for a corporation tax return for the twelve months from the date the company was formed. Even if the company isn’t active until later this must be submitted unless HMRC says otherwise. Tell HMRC that the company was dormant and when it became active and it may then let you off sending a return for the dormant period.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.