Trading.... or not?!

Ellabobbin

A friend registers a company at Companies house and registers it as a dormant company with HMRC as they are not ready to begin trading at that point. Several months later after lots of groundwork they are ready to go.

The lead time for receiving their first products to sell is 3 months. When will the company no longer be dormant, upon placing the first order or upon receipt of their first order?

Thank you for taking the time to help me with this, I have tried googling several variations of the question with no joy!!

stefanboro

I would say it's definately when the company placed the order. If you think about it, accounts are prepared on an accruals basis. On this basis the company is active when it makes the purchase, regardless of when the goods are recieved / money physically paid.

Ellabobbin

Many thanks, that was my thinking.

I had hoped to ask the MIP who is kindly giving me experience of working in practice but he has been out of the office a lot seeing clients for some reason!!!!

PGM

stefanboro wrote: »

I would say it's definately when the company placed the order. If you think about it, accounts are prepared on an accruals basis. On this basis the company is active when it makes the purchase, regardless of when the goods are recieved / money physically paid.

So on an accruals basis, it might not start work until 1.8.11 after receiving the order on 1.7.11, so which date would you pick?

stefanboro

PGM wrote: »

So on an accruals basis, it might not start work until 1.8.11 after receiving the order on 1.7.11, so which date would you pick?

Apologies - have used "accruals" liberally - I'm not referring to "matching" per se but recording a transaction when it occurs. To my mind the important aspect is that if the order is made in month X but does not arrive until month Y the transaction is recorded in month X.

Accounting 101 - surely I haven't got this wrong? haha

stefanboro

Ellabobbin wrote: »

Many thanks, that was my thinking.

I had hoped to ask the MIP who is kindly giving me experience of working in practice but he has been out of the office a lot seeing clients for some reason!!!!

Also, this link may help you:

http://www.hmrc.gov.uk/ct/getting-started/trading.htm

Ellabobbin

stefanboro wrote: »

Also, this link may help you:

http://www.hmrc.gov.uk/ct/getting-started/trading.htm

Thank you... Applied literally once the order is placed they have started buying goods to sell for profit and so are active??

stefanboro

Ellabobbin wrote: »

Thank you... Applied literally once the order is placed they have started buying goods to sell for profit and so are active??

Aye - That's what I would say and HMRC say the same in the link too.

stefanboro

Ellabobbin wrote: »

Thank you... Applied literally once the order is placed they have started buying goods to sell for profit and so are active??

And of course, the order relates to the trade and are not to be confused with pre-trading expenditure.

Ellabobbin

stefanboro wrote: »

And of course, the order relates to the trade and are not to be confused with pre-trading expenditure.

Indeed...

Thank you for your help, I have a very steep learning curve ahead of me before I can get my licence, but I am determined!!

Dcollins

Trading normally commences when a company acquires a source of income.

When the order has been placed, the company is still not in a position to trade because it has nothing with which to trade. It has not received goods, nor does it have a source of income. Placing the order is part of the company's preparations for trade.

See CTA 2009 S9 and HMRC's BIM70505, and CAA 2001 might help too.

My thinking is that a retail shop or pub commences trade on the day it opens. Stock has been purchased, and fitting carried out, but these are considered pre trading activities.

stefanboro

Dcollins wrote: »

Trading normally commences when a company acquires a source of income.

When the order has been placed, the company is still not in a position to trade because it has nothing with which to trade. It has not received goods, nor does it have a source of income. Placing the order is part of the company's preparations for trade.

See CTA 2009 S9 and HMRC's BIM70505, and CAA 2001 might help too.

My thinking is that a retail shop or pub commences trade on the day it opens. Stock has been purchased, and fitting carried out, but these are considered pre trading activities.

Yes, BIM70505 does muddy the water somewhat:

As a general rule a trade cannot commence until the trader:

•is in a position to provide those goods or services which it is, or will be, his or her trade to provide

This is slightly contradictive of the general guidance:

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

Arguably the purchase of the stock was, in this case, with a view to start the business. But now I'm just not sure.

Ellabobbin

Hmm....

How I'm wishing he had decided to be a window cleaner, much easier (or at least a product with a shorter lead time)..

Though I'm learning loads and finding out where to look for information

Dcollins

I think HMRC's guidance is often vague and unhelpful, and confusing in a lot of cases.

deanshepherd

I don't think it really matters.

You would be amazed how many of my clients started their business on 6th April..

Dean

deanshepherd wrote: »

I don't think it really matters.

You would be amazed how many of my clients started their business on 6th April..

Really?!

Well you'd be amazed how many of my clients cease their business on the 5th April..

Regards

Dean

deanshepherd

Uncanny!!