Business tax – guidance

Corporation Tax: trading and non-trading

Advice for new and existing companies and organisations on being 'active', trading and non-trading, and being dormant.

Overview

HM Revenue and Customs (HMRC) may consider your company or organisation to be ‘active’ for Corporation Tax purposes when it is, for example, carrying on business activity, trading or receiving income.

In some circumstances, HMRC would not consider your company or organisation active for Corporation Tax purposes. In this case, your company or organisation is ‘dormant’, for example not active or not trading.

HMRC may also deem your unincorporated organisation, such as a members’ club, dormant for Corporation Tax purposes if it is active or trading but it’s due to pay Corporation Tax of less than £100 for an accounting period.

What is active for Corporation Tax purposes

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.

It may also not match definitions in the various accounting conventions that are used to prepare audited accounts, such as the Financial Reporting Standards issued by the Accounting Standards Board, or the International Financial Reporting Standards issued by the International Accounting Standards Board.

What is not active for Corporation Tax purposes

There are a number of circumstances where HMRC would generally consider your company or organisation not to be active for Corporation Tax purposes.

When your company or organisation has not yet started trading

HMRC considers that your company or organisation has not yet become active or started trading if it has not yet engaged in any business activity (business activity means carrying on a trade or profession, or buying and selling goods or services with a view to making a profit or surplus).

Your newly-formed company or organisation may not be active for Corporation Tax purposes. However, you may still carry out activities (known as ‘pre-trading activities’) or incur costs (known as ‘pre-trading expenditure’) before you officially open your business without HMRC deeming that you have started trading.

Activities or expenditure to do with setting up a business that are not considered trading by HMRC for Corporation Tax purposes include:

  • preliminary activities such as writing a business plan or negotiating contracts
  • preliminary expenditure such as incurring costs with a view to deciding whether to start a business

When your company or organisation has previously traded but has stopped trading

HMRC generally considers a company or organisation to be dormant for Corporation Tax purposes if it’s no longer carrying out any business activity.

If your business is a company, you should normally already have notified Companies House that your company is dormant.

What does dormant for Corporation Tax mean

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

When HMRC will treat clubs and unincorporated organisations as dormant

HMRC may treat your club or unincorporated organisation as dormant for Corporation Tax purposes if it’s active but both the following conditions apply:

  • your organisation’s annual Corporation Tax liability must not be expected to exceed £100
  • you run your club or organisation exclusively for the benefit of its members

For each year of dormancy your organisation must not have any:

  • allowable trading losses for which it may want to claim relief
  • assets it’s likely to dispose of, which would give rise to a chargeable gain
  • interest or annual payments to pay out from which tax is deductible and payable to HMRC

HMRC will write to you proposing to make your organisation dormant. They won’t send you a ‘Notice to deliver a Company Tax Return’ and they’ll review this at least every 5 years. HMRC may also apply this treatment to your flat management company.

But HMRC won’t treat your organisation as dormant if it’s a:

  • privately owned club run by the members as a commercial enterprise for personal profit
  • housing association or you’re a registered social landlord (as designated in the Housing Act 1986)
  • trade association
  • thrift fund
  • holiday club
  • friendly society
  • company which is a subsidiary of, or is wholly owned by, a charity

Tell HMRC that your company or organisation has ceased to be dormant and is now active

You must tell HMRC within 3 months of starting your tax accounting period if your limited company is within the charge of Corporation Tax and is now active. The best way to do this is to use HMRC’s online registration service.

Alternatively you can provide the information about your company to HMRC in writing.

Unincorporated organisations such as clubs, societies and associations must also tell HMRC if they become active.