It’s common to mistake a dormant company for an obsolete one; fortunately, this article comprehensively answers the question, “What is a dormant company?” to help you fully understand its functions as you set out on starting a new company.
What Is a Dormant Company?
There’s no replacement for answering the question, “What is a dormant company?” than a clear and concise definition. Companies are dormant if they are inactive and not trading (or receiving any type of income from trading). However, the company has to be registered with Companies House and may be dormant from its incorporation date or its trading date.
What Is a Dormant Company in Relation to Trading?
The question, “What is a dormant company?” cannot be considered without fully understanding its relative dichotomy — trading. Generally, dormant companies cannot trade or receive income that includes:
- The purchase and sales of goods and services
- Leasing/buying properties
- Employment of staff
- Directors’ salary payments
- Investment management
- Receiving dividends
- Issuing shareholder dividends
- Earning interest from/or paying bank charges
- Using the business bank account for legal or accounting fees
If you tick any of the above, then your company many not be considered dormant. However, some transactions that can be practised by a dormant company, include:
- Shares payment by the maiden shareholders (those who joined the company at the time of incorporation)
- Fees and charges paid to Companies House for filing an annual confirmation statement
- The payment of any late filing penalties to Companies House
What Is a Dormant Company in Relation to Corporation Tax?
If your company has stopped trading and has no income from e.g. investments, then it will be dormant for Corporation Tax, and if the following applies:
- You are a new limited company and yet to begin trading
- You are an unincorporated association/club owing less than £100 Corporation Tax
- You are a flat management company
HMRC may consider your unincorporated company to be dormant for Corporation Tax reasons if it remains active but adheres to the following:
- The annual Corporation Tax liability of your organisation does not/is not expected to be over £100
- Your club/organisation runs exclusively for member benefits
For each year of your organisation’s dormancy, your company may not have any of the following:
- Allowable trading losses for which it may want to claim relief
- Assets that are likely to be disposed, which would give rise to a chargeable gain
- Tax deductible interest/annual payments (payable to HMRC)
However, HMRC will NOT consider your company to be dormant if the following applies:
- Your organisation is a privately-owned club run by its members as a commercial enterprise for profit
- Your organisation is a housing association or you’re a registered social landlord (as designated in the Housing Act 1986)
- Your organisation is a trade association
- Your organisation is a thrift fund
- Your organisation is a holiday club
- Your organisation is a friendly society
- Your organisation is a subsidiary of, or is wholly owned by, a charity
When HMRC deems your company dormant, a letter will be sent to you notifying you of your Corporate Tax exemption and/or that you’re not permitted to file Company Tax Returns.
What Is a Dormant Company in Relation to Companies House?
As mentioned, your company will be considered dormant there’s been no significant accounting transactions during the financial year, and it is registered with Companies House.
The transactions have to be limited to:
- Shares payments
- Charges made payable to Companies House for changing company name
- Re-registration of company
- Filing annual returns
- Payments of Companies House penalties
However, you still have to file your annual accounts and confirmation statement with Companies House even if your limited company is dormant for Corporation Tax.
What Is a Dormant Company in Relation to Small Companies and Micro-entities?
“What is a dormant company?” may be asked with some scrutiny by small companies or micro-entities who would expect different implications of being dormant compared to larger organisations. If your company is dormant and qualifies as “small”, you can file “dormant accounts” instead without the need to include an auditor’s report with your accounts.
According to the GOV.UK website, your company is considered “small” if it meets any of the following points:
- Your company turnover of £10.2 million or less
- Your company has £5.1 million or less on its balance sheet
- Your company employs 50 people (or fewer)
As a small company, it’s up to you whether or not you send a copy of the director’s report, profit and loss account and send abridged accounts to Companies House. However, abridged accounts may only be sent if each of your company members agree. It’s worth noting that an abridged account means that less of your company information will be publicly visible from Companies House.
Your company is considered a “micro-entity” if it meets any of the following points:
- Your company has a turnover of £632,000 or less
- Your company has £316,000 or less on its balance sheet
- Your company employs 10 people (or fewer)
As a micro-entity, you can prepare accounts that adhere to minimum statutory requirements (Companies House only requires a basic balance sheet with less information). Additionally, micro-entities can also benefit from the same exemptions given to small companies.
However, as part of your small company’s (or micro-entity) Company Tax Return, statutory accounts have to be sent to both your members and to HMRC.
What Is a Dormant Company in Relation to Banking Requirements?
Although a separate bank account is needed for an active company, it’s unwise to have a business bank account for your dormant company as it may indefinitely remain dormant and is not permitted to receive or spend any money. If your company spends or receives money, its dormant status will instantly come to an end and will be classed as active for Corporation Tax reasons.
Remember, minor actions such as paying bank charges, or obtaining interest, will trigger a change in status from dormant to active.
If you decide to restart trading, simply open up a new business bank account for your business. Until then you can pay for any associated costs with your dormant company through your personal bank account.
There are a number of advantages of having a dormant status, including protection of your brand name, preparing a restructure, owning intellectual property, and dealing with demised/owners with ill health.
Although your company can become dormant at any time, you must ensure you contact HMRC and file the necessary details at Companies House in a timely manner. Additionally, if you wish to revert to a trading company under your dormant company name, you must inform HMRC of your status change within three months of trading. You can do this by signing in to your online HMRC account and amending your company to “active for Corporation Tax”.
To find out more about dormant companies and how you can change your company status, simply contact our dedicated company formations team now for expert advice.