CFM71030 - Other tax rules on corporate finance: bank and building society dormant accounts

What is a dormant account?

When a customer has made no withdrawals or deposits in a bank/building society account for a period (usually but not always of at least a year) and has not contacted the bank, the bank will write to the customer for confirmation that the account should remain open. If no reply is received after a stated period, the bank will treat the account as dormant.

Once dormant, no further statements are issued. The customer can reactivate the account by contacting the bank. Where the customer does not have full details of the bank and account number, the British Bankers’ Association Dormant Account Unit will deal with enquiries.

What the bank or building society does

Under New UK GAAP, Old UK GAAP (including FRS 26) and IFRS, financial liabilities such as dormant accounts can only be derecognised from the balance sheet when they are extinguished. An extinguishment can only arise if the debtor either settles the liability or is legally released from its obligations to the creditor. Therefore, dormant accounts are not credited to profit or loss.

Before FRS26 was introduced, where there was real doubt that funds in a bank account will ever be claimed by the customer, some banks had a policy of crediting the sum appropriated to profit or loss.

Other banks did not regard amounts in dormant accounts as profit and therefore did not credit these sums to profit or loss.

An unclaimed balance is a loan relationship of the bank. Under the loan relationships rules in FA96, profits on loan relationships are taxed as they accrue in the accounts provided those accounts are prepared in accordance with GAAP. The credits were therefore taxed in the year they were taken to the profit and loss account.