'Trading' advice from our accountants - Is this correct?

[anonymous-user]

Hi all,

I have a query over advice received from our long standing accountants.

One of our family owned Ltd Co's is being described as 'inactive' or 'not trading' by our accountants. They have therefore advised us, or practically banned us, from doing things like taking on employees and paying wages, buying a new van, adding or changing Directors, charging things to the Ltd Co such as a new laptop, new phone, and so on.

Over the last 2-3 years, the Ltd Co has purchased several different pieces of land, which we have then obtained playing permission on for residential housing, and we intend to install roads, utilities, etc then sell off the plots as self build, or possibly build out a couple of the plots ourselves and sell the finished houses.

Company outgoings have included buying the land, engaging consultants, engineers, architects, paying planning fees to the council, buying some small pieces of equipment, and so on.

Clearly this isn't a 5 minute job, and we expected to be spending over these last couple of years and probably the coming year, before we get close to being able to sell any finished products and therefore have an income to the company.

The accountants have advised that because we are 'just' buying and owning land, and because we haven't sold anything yet, we aren't a company that is 'active or trading' and in their opinion, we cannot change or add Directors, we can't pay ourselves a salary, and we can't do things like buy new vans and claim the VAT back, as they say this would 'look suspicious to HMRC', for reasons I don't fully understand.

My opinion is that surely some companies run at a loss for years, pay salaries, buy vehicles, buy equipment, and so on, before they get anywhere close to trading or generating turnover, and surely this isn't an issue?

Any thoughts?


Edited to add:

I have made it clear in my post the nature of the business is 'buying and owning land' with a side order of 'developing that land' as the accountants suggested that the category/nature of the business was relevant to their advice.

We have another Ltd Co which owns commercial property and rents it out, and has done for decades. Thats the sum total of the company. I presume that particular business may allow the employment of employees and paying of wages, buying of vans etc, or would you estimate that also falls into the same category of 'not being a company which can allow employees and wages' as it is just owning property?

Maybe all of this is fine, but I can't shake the feeling that our accountants are either just playing everything so cautiously it is ridiculous, or they are clueless, or they can't be arsed with us anymore.

Edited by anonymous-user on Friday 10th June 12:33

[Eric Mc]

Is the company generating income?

If it isn't, how does it propose to fund the payment of salaries to the directors (or dividends to the shareholders)?

[rlengthorn]

Hi,

On general principles, I would say that your accountants are correct, certainly from a tax point of view at least.

Until the company has a source of income, i.e. it starts trading by selling things, it can't claim relief for any expenses such as employee costs etc. However, assuming it does later start to trade, then these costs can then be claimed when trading commences, and offset against the trading income.

Similarly, for VAT, the company can't register for VAT until it has taxable supplies, i.e. making vatable sales, so it wouldn't be in a position to reclaim VAT. Again however, once the company does commence trading, and registers for VAT, it can recover input VAT on goods purchases from the previous 4 years, as long as these goods are still in the business, and it can recover VAT on services purchased in the 6 months before registering.

The bit about not being able to appoint director's and so on, appears a little odd though, as I don't see why that would matter, as long as you aren't paying them.

Your other company is not a trading company, just renting property out makes it a property business, but you can still deduct appropriate costs from this property income.

[anonymous-user]

Eric Mc said:

Is the company generating income?

If it isn't, how does it propose to fund the payment of salaries to the directors (or dividends to the shareholders)?

Thanks Eric.

There was a sum of money in the company from the profit of previous trading. That previous trading was retail. The business name was sold, the stock was sold, and the premises, vehicles etc were sold, and the money went back into the company.

So what is sat in the company account now is a combination of years worth of profits, plus the sale of items the old business stock and premises etc. This is what is being used to now fund a new venture. There is enough in there to spend several more years buying land (within reason) paying salaries, buying and and equipment, carrying out works on the sites, etc.

[anonymous-user]

rlengthorn said:

Hi,

On general principles, I would say that your accountants are correct, certainly from a tax point of view at least.

Until the company has a source of income, i.e. it starts trading by selling things, it can't claim relief for any expenses such as employee costs etc. However, assuming it does later start to trade, then these costs can then be claimed when trading commences, and offset against the trading income.

Similarly, for VAT, the company can't register for VAT until it has taxable supplies, i.e. making vatable sales, so it wouldn't be in a position to reclaim VAT. Again however, once the company does commence trading, and registers for VAT, it can recover input VAT on goods purchases from the previous 4 years, as long as these goods are still in the business, and it can recover VAT on services purchased in the 6 months before registering.

The bit about not being able to appoint director's and so on, appears a little odd though, as I don't see why that would matter, as long as you aren't paying them.

Your other company is not a trading company, just renting property out makes it a property business, but you can still deduct appropriate costs from this property income.

Thanks.

That ties up (near enough) with what we have been told.

The reason I'm asking all this, is that at some point the new business venture will require our full attention, and that will involve stopping doing whatever else we are doing, employing ourselves or others in this new company, paying salaries, buying a vans, and so on, all whilst we don't make a profit or sell anything for another year or so.

I presume you just report a loss for these years?

With regards to the bit in bold, when you say appropriate costs, would these possibly include things like: A person or persons employed to manage the properties, inspect the properties, deal with the businesses who lease//rent the properties, arrange the insurance, commercial vehicles/a van to drive to inspect the properties, and so on?

Thanks

[Panamax]

This sounds a whole lot like "continuation of trading" so I'm not in the least bit surprised your accountants are concerned.

Put at the simplest, just because a small company hasn't sold anything this week doesn't mean it's stopped trading.

[anonymous-user]

Panamax said:

This sounds a whole lot like "continuation of trading" so I'm not in the least bit surprised your accountants are concerned.

Put at the simplest, just because a small company hasn't sold anything this week doesn't mean it's stopped trading.

Thank you.

This is why I'm asking. Our accountants have just said quite a lot of "No, you can't do that" or "technically not" recently, and efforts to ask them to explain why have yielded responses that were unhelpful or short, or answers that I'll admit to not fully understanding as I'm not a finance or tax expert.

I felt I would learn a lot more from PH than from speaking to our accountants.

[rlengthorn]

Lord Marylebone said:

rlengthorn said:

Your other company is not a trading company, just renting property out makes it a property business, but you can still deduct appropriate costs from this property income.

With regards to the bit in bold, when you say appropriate costs, would these possibly include things like: A person or persons employed to manage the properties, inspect the properties, deal with the businesses who lease//rent the properties, arrange the insurance, commercial vehicles/a van to drive to inspect the properties, and so on?

Thanks

If the properties require an employee(s) to manage them, maintain them, etc. then yes those would be perfectly appropriate costs. Essentially, you treat a rental business like this as a trade, albeit it counts as property income (net of the expenses) rather than trading income. For a company, the difference between rental income and trading income only really matters for the purpose of using losses. You would get tax relief for capital allowances on the purchase of a van rather than an expense deduction, but assuming you haven't bought any other similar assets, it would largely equate to the same anyway.