Carrying back losses and the definition of trading

[jamesbrown]

There may be exceptions to this - for example during the Coronavirus furlough period where a number of owner directors were both looking for work and furloughed, and taking a salary. All legitimately.

If they were looking for work, the company was trading. I think you're confusing the status of an employee or director for the purposes of meeting the criteria of some gov't scheme ("furloughed") and the trading state of the company.

[northernladuk]

There may be exceptions to this - for example during the Coronavirus furlough period where a number of owner directors were both looking for work and furloughed, and taking a salary. All legitimately.

Bit irrelevant now but I don't think that is technically right. A director could be furloughed as an employee but could not do any work for the company. They could carry out statutory duties around keeping the LTD's legal responsibilities but looking for work is Sales and an aspect of work and not a statutory duty.

In reality who knows and who would care, but technically looking for work for the LTD wasn't legitimate.

[PerfectStorm]

Agree with your accountant. Unless you are actively seeking work and can evidence that, there is no active trade. Performing necessary administrative functions is not being engaged in a trade.

There may be exceptions to this - for example during the Coronavirus furlough period where a number of owner directors were both looking for work and furloughed, and taking a salary. All legitimately.

[NeverBackToPerm]

Thanks to everyone for the input. I will follow my accountant's advice and not offset the loss.

I've been a bit lazy in the past, taking breaks between contracts and waiting for lucrative and/or interesting ones. I do not think that being selective means I wasn't genuinely trading. However I can't really say that I've been actively searching recently and since I'm not feeling motivated I'm now thinking it's time to close my ltd and retire.

[Guy Incognito]

You really should have stuck a few more long lunches on the old expense account to keep up the facade of business development.

[Craig@Clarity]

Just to add, imagine you're a double glazing sales person. You've knocked on 100 doors but no-one has taken you up on your delightful offerings. Just because you've generated zero sales doesn't mean you're not trading. You are!

A dormant company is one that has done absolutely nothing in it's entire existence other than be incorporated.

A non trading company is one that has traded but now is just sat there and doing absolutely nothing. For the purpose of corporation tax in the current financial year, this is important if you have associated companies.

[jamesbrown]

The thing you’d need to demonstrate is that any salary payment is “wholly and exclusively for the benefit of the trade”. Obviously, there is no problem with a salary whatsoever, the question is whether it is deductible for CT purposes in the absence of a trade. For remuneration during benched periods, it is quite easy to justify for company admin. When there is no trade and you’re carrying back losses, I think you’re both pinning a big “kick me” on your back w/r to meeting the test and more likely to be investigated in the first place. Accountants are generally conservative, but generally with good reason.

[northernladuk]

My last contract ended in March 21 and my company year runs to end Nov so my ltd company made a profit and paid tax in year end Nov21 but did not bring in any revenue in year end Nov22. On a few occasions my accountant has said that it is difficult to justify paying myself a salary and recommended I stop and move to a reduced accountancy fee for a dormant company. However, I opted to continue paying myself a salary and this was the primary cause of a loss in the year end Nov22 accounts (I did not make any pension contributions in this year to avoid making the loss bigger).

Firstly don't confuse the term 'dormant company'. To be dormant there has to be absolutely no transactions and you have to fill stuff in to be registered as dormant. The other option is just a non trading company that is ticking over. They are very different.

What are the reasons your company hasn't brought any income in? Are you genuinely struggling to find business or are you just not using it because you've taken a perm job or just not bothering working? People are using the argument that you are actively looking for work but I don't see anything in this that actually tells me you are. There is information missing and often when that happens it's because the OP isn't telling us the whole truth.

Just from that first paragraph it doesn't sound to me that you are a full time contractor and are in full trade as such. If you aren't then you are stretching using trading rules to justify what you do if you don't have any intention of actually working.

On a couple of previous occasions in my company's history I have had similar years and on both occasions carried back the loss and gone on to generate revenue again in future years. This time my accountant is saying:

"HMRC’s guidance states that the company’s losses should be genuine trading losses. As the main reason for the trading loss is the salary processed and paid to yourself, it would be difficult to justify the loss, as the salary isn’t in the best interest of the company, nor is the company trading."

And I'd agree as nothing you've said above makes me believe you are genuinely trading but are instead just dipping in and out and playing lose with the rules. The details are important here and you've not given us them.

My argument is that by processing payroll, paying accountancy fees, filing returns etc the company is trading, it just isn't doing a very good job of it since there is no revenue coming in! The tax reclaim would only be about £2K so it's not a massive deal (although I would rather have it than not have it) but I just wanted to check that my accountant is not being overly cautious? Note that although last year I was hoping to generate revenue again, I now think it is likely that I will end up closing the company without carrying out any further contracts.

What aren't you telling us. Why isn't there revenue coming in? You really can't get a gig as long as you say? Or you aren't on the market to get the gigs. If it's the latter then I think your argument is flawed. You aren't trading, you are just milking your LTD to suit yourself.

[Lance]

Assuming that the company isn't insolvent, and therefore has retained profit, one could argue that it is trading by the very fact that the shareholders are not liquidating.
It's clear to me that the OP is seeking work by taking a salary. Being able to evidence that is, IMO, not required.
If the OP had another long term job, he would not be taking a salary and would be investigating liquidation. The fact that this is not happening is, to me, "trading".

Accountants are sometimes quite rigid in their thinking and avoid the unusual.
This year I have taken no salary (for reasons) and the accountant took some convincing that this was "a good thing to do, and just bloody do it." Nothing wrong with it, as he eventually agreed, just unexpected.


IANAL

[jamesbrown]

So by extension, sending the accountant a few copies of emails to agents or clients from the sent items email folder should leave no doubt that the company was seeking revenue. And the director should be rewarded for that even if he/she fails to secure business.

Yes, as long as the OP is actively seeking work, they are trading to my mind, no problem. There will be benched periods for most contractors and that isn't a big deal and there's generally no question about whether a salary is deductible against CT in those circs. The issue arises when work is no longer being sought IMO. All assuming legitimate behavior in the best interests of the company, of course, no shenanigans.

Should add that the main "tell" for me in the OP was the intention to close, which doesn't imply work being sought.

[Fred Bloggs]

( But, to be clear, seeking work is enough, it doesn't matter whether you succeed or fail. )

So by extension, sending the accountant a few copies of emails to agents or clients from the sent items email folder should leave no doubt that the company was seeking revenue. And the director should be rewarded for that even if he/she fails to secure business.

[jamesbrown]

( But, to be clear, seeking work is enough, it doesn't matter whether you succeed or fail. )

[jamesbrown]

Agree with your accountant. Unless you are actively seeking work and can evidence that, there is no active trade. Performing necessary administrative functions is not being engaged in a trade.

[NeverBackToPerm]

My last contract ended in March 21 and my company year runs to end Nov so my ltd company made a profit and paid tax in year end Nov21 but did not bring in any revenue in year end Nov22. On a few occasions my accountant has said that it is difficult to justify paying myself a salary and recommended I stop and move to a reduced accountancy fee for a dormant company. However, I opted to continue paying myself a salary and this was the primary cause of a loss in the year end Nov22 accounts (I did not make any pension contributions in this year to avoid making the loss bigger).

On a couple of previous occasions in my company's history I have had similar years and on both occasions carried back the loss and gone on to generate revenue again in future years. This time my accountant is saying:

"HMRC’s guidance states that the company’s losses should be genuine trading losses. As the main reason for the trading loss is the salary processed and paid to yourself, it would be difficult to justify the loss, as the salary isn’t in the best interest of the company, nor is the company trading."

My argument is that by processing payroll, paying accountancy fees, filing returns etc the company is trading, it just isn't doing a very good job of it since there is no revenue coming in! The tax reclaim would only be about £2K so it's not a massive deal (although I would rather have it than not have it) but I just wanted to check that my accountant is not being overly cautious? Note that although last year I was hoping to generate revenue again, I now think it is likely that I will end up closing the company without carrying out any further contracts.