On-line
tool: Step 5 - Dormant company exemption
Did the taxpayer record any accounting transactions in
the accounting year?
Click the answer: YES
NO
Guidance to help you
determine the answer:
One of the more significant changes that arose from the short
period of consultation between the Pre-Budget Report just before
Christmas 2003 and the Budget in March 2004 is a new exemption for
dormant companies. With the publication of the Finance Bill in
April 2004, we now know more about this.
The exemption appears to be in response to submissions about group
companies that have ceased any activity and whose only asset is a loan
to their parent company, on which no interest is paid (so there is no
accounting entry to make). If the group is large enough to fail
the
tests for the small and medium-sized exemptions, the new transfer
pricing rules might have required a deemed interest charge for the
dormant company, and this would create a tax liability which would mean
the company was no longer “dormant”. The exemption is intended to
prevent this.
It remains to be seen if the
actual legislation will, in practice, provide relief for the many such
companies.
The exemption applies to companies that are, as
at 1 April 2004, dormant for the purposes of section 249AA, Companies
Act 1985
(and therefore are not required to be audited or to file a tax return)
and, were it not for the transfer pricing rules, would continue to be
dormant thereafter. They are also required to have been dormant
for a period prior to 1 April 2004.
The exemption only applies where the dormant company has understated
its profits by virtue of non-arm's length transfer pricing. In
cases
where, say, the dormant has received an interest free loan from a
non-dormant related party, this exemption is of no help. The
non-dormant lender will be deemed to have charged an arm's length rate
of interest. The dormant would have the right to claim a
deduction
under a corresponding adjustment, but at the cost of forgoing the
dormant status.
To qualify as dormant in a given accounting year, a company must have
recorded no accounting transactions in that year. We understand
that banks,
insurance companies and financial services companies cannot be
dormant.
The 'small print'
The
comments on this page and elsewhere on this website are of a
general nature. It is not practicable in a general review such as
this
to consider every convolution of the UK transfer pricing rules or of
any other tax law that may be relevant. Moreover, these pages
naturally do not take into account the specific facts relating to any
particular taxpayer. Therefore, although the guidance in this
website
should give a good indication of the likely position under the transfer
pricing rules, taxpayers should obtain professional advice to verify
the position, or carry out their own analysis.
Neither
TPS nor its affiliates
and employees
make any representation regarding the
completeness or accuracy thereof and they accept no responsibility for
any loss or damage incurred as a result of any user acting or
refraining from acting upon anything contained on these pages or upon
its omission therefrom.
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