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Solutions Limited 2004-7
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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