Dormant Companies and Corporation Tax
Dormant companies are governed by the Companies Act 1985, the Companies Act 2006, the Companies Act 2006 (Commencement No. 3, Consequential Amendments, Transitional Provisions and Savings) Order 2007, and the Companies Act 2006 (Commencement No. 5, Transitional Provisions and Savings) Order 2007.
Just because the company doesn’t own the service charges and may not have any figures to disclose in either the balance sheet or the profit and loss account also doesn’t mean that it is dormant (for the purposes of the Companies Act). The Draft Tech 01/10 Release, Accounting for Service Charges stated that this was because of third party contracts made for the provision of goods and services to the property. This draft guidance was followed by the release of final guidance in the form of ICAEW Technical Release 03/11) jointly issued by the ICAEW, ARMA, RICS and the Institute of Chartered Accountants in Scotland. This re-iterated the need for residential service charges, (and related expenditure), to be excluded from the statutory accounts of RMC and RTM companies because of the statutory trust nature of those transactions
In May 2012, the UITF issued Information Sheet 92 Residential Management Companies’ Financial Statements. The main aim of the paper was to assist residential management companies to determine whether they are acting as principal or agent when undertaking residential service transactions with third parties, and thereby determine which transactions should be recognised in their financial statements. In response to the proposals, ICAEW submitted representation letter 167/12.
What follows is an extract from that letter.
RMCs have in effect a triple accounting obligation.
- As companies, they are accountable to members and must prepare statutory accounts for them.
- They are also likely to be accountable under their leases to lessees and therefore must provide information to these individuals about service charges paid and expended.
- In addition, those paying service charges have a right under the Landlord and Tenant Act 1985 to demand a ‘statement of charges’ detailing certain information about service charges paid.
With regards to corporation tax the 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 such as:
- 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 will be removed from the Companies Register.
There are however expenses associated with keeping a dormant company on the register and it must still prepare and submit various documents including the annual company balance sheets and the Annual Return. The cost for processing these at Companies House do not count as significant accounting transactions and other specific allowable transactions that can be disregarded are:
- Payment for shares taken by subscribers to the memorandum of association when the company is first formed;
- Fees paid to the Registrar of Companies for a change of company name;
- The re-registration of a company;
- Filing annual returns;
- Payment made in respect of civil penalties imposed by the Registrar of Companies for delivering accounts to the Registrar after the statutory time allowed for filing. For accounting periods ending before 26th July 2000 only payment for shares taken by subscribers to the memorandum of association may be disregarded.
- Corporation Tax
HMRC may apply the above treatment to the RMC – whether it’s incorporated or not – if, as well as meeting all the criteria laid out in the previous sections, it meets all of the following additional criteria:
- The company business consists of the management, (on a non-profit making basis), of a block(s) of flats or apartments for the owners, lessees or tenants of the flats or apartments;
- The company’s Articles of Association ensure that only people who have an interest in the managed property own the company’s shares;
- The company must not be entitled to receive any income from land;
- The company can’t pay dividends or make any other distribution of profit.