A dormant company is often mistakenly confused for a company that is “closed” or “obsolete”. Fortunately, this article will clear up the confusion by outlining the definition of a dormant company and what it could mean for your business.
The Definition of a Dormant Company
A dormant company is “dormant” (or considered inactive) if it is NOT trading or receiving any form of income from trading. However, it MUST be officially registered with Companies House and be can be dormant from the date of its incorporation, or even after the commencement of active trading.
Consequentially, a company that is no longer trading, and reported as such to HMRC, will be considered dormant (or inactive) for the purpose of corporation tax (see below).
What Constitutes “Trading”?
Since a dormant company is not allowed to trade, it’s important to recognise what constitutes “trading”.A dormant company may not carry on trading or receive any kind of income that includes:
- The purchasing and selling of goods and services
- Property leasing or buying
- Employing members of staff
- Paying directors’ salaries
- Management of investments
- Receiving dividend payments
- Issuing shareholder dividends
- Earning interest on/or paying bank charges
- Using the business bank account to pay accounting or legal fees
The presence of any of the above means that your company will no longer be qualified for a dormant status. However, there are certain transactions and activities that are disregarded and can be carried out by a dormant company, including:
- Payment of shares by the first shareholders joining 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
A Dormant Company in Relation to Corporation Tax
Your company will be dormant for Corporation Tax if it has ceased trading and has no other income (such as income from investments). Additionally, your company will be dormant for Corporation Tax if any of the following is true:
- You’re a new limited company, yet to begin trading
- You are an unincorporated association/club that owes less than £100 Corporation Tax
- You are a flat management company
HMRC may deem your unincorporated company as dormant for Corporation Tax reasons if it is active but adheres to two caveats:
- The annual Corporation Tax liability of your organisation does not/is not expected to be over £100
- Your club/organisation runs exclusively for the benefits of its members
For every year of your organisation’s dormancy, it must 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 as 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 believes that your company is dormant, they will send you a letter notifying you of your Corporate Tax exemption and/or that you don’t have to file Company Tax Returns.
A Dormant Company in Relation to Companies House
As stated above, your company will be deemed dormant if it’s had no significant accounting transactions (any transaction required to be recorded into company accounts) during the fiscal year and is registered with Companies House.
For a company to considered dormant according to Companies House, its transactions must be limited to:
- Payments for shares
- Fees paid to Companies House for changing company name
- Company re-registration
- Filing annual returns
- Payments of Companies House penalties
Take note, you still have to file your annual accounts and confirmation statement with Companies House even if your limited company is dormant for Corporation Tax and Companies House.
What Information Is Required by Companies House?
Each year, dormant companies have to prepare dormant accounts and a confirmation statement for Companies House. The accounts comprise a balance sheet along with any relevant notes. These can be delivered to Companies House online or via post (form AA02).
The annual confirmation statement (formerly known as “annual return”) is a document that outlines/confirms important company details and will contain obligatory information regarding a dormant company. Including:
- Your company’s name
- The registered office address
- SAIL address (if applicable)
- Details of company directors
- Details of company secretary (if appointed)
- Details of shareholders
- The location of statutory company records
- Information regarding issued shares
- Information about people with significant control (PSCs)
- Nature of business activities (Standard Industrial Classification “SIC” code)
NOTE: The SIC code for a dormant company is 99999. If your company becomes dormant or non-trading after a period of activity, your SIC code must be updated on the next confirmation statement.
Being a Dormant Small Company and Micro-entity
If your company is dormant according to Companies House 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 may be deemed “small” if any two of the following are true:
- 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, you can decide whether or not to send a copy of the director’s report and profit and loss account and send abridged accounts to Companies House. However, abridged accounts can only be sent if all of your 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 any two of the following are true:
- 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 are in line with minimum statutory requirements (Companies House only requires a basic balance sheet with less information). Additionally, micro-entity can also benefit from the same exemptions given small companies.
However, as part of your small company’s (or micro-entity) Company Tax Return, statutory accounts must still be sent to both your members and to HMRC.
The Advantages of Being a Dormant Company
There are a number of reasons why a company would want a dormant status:
Secure a brand name:One of the most common reasons for choosing company dormancy is to secure a brand name or trademark for your company at the earliest in order to prevent anyone else trading under the same name. This is often done during the planning stages of setting up a new business that may be months, or even years, away from a stable launch. Securing a company name or brand name early on can make planning easier as the company will have an established name upon which they can build their company.
Protect a brand name:Some companies choose dormancy in order to protect a company name that is very similar to their own. This will prevent anyone from starting a business under a similar name to your company name that might allow them to benefit from your established profile. It’s not rare to find dormant companies set up just to protect a brand name and remain dormant for its lifetime.
Preparation of restructure:Having a dormant company can help you prepare for the restructuring or division of an existing business, with subsequent movement of some sectors that will operate under the secured dormant company name. However, as soon as the new company starts trading, the dormant status will be lost.
Ownership of intellectual property: A dormant company may be a place/entity to hold intellectual property or company assets.
To deal with terminal termination or ill-health of business owner:Setting up a dormant company can also be a useful move for businesses that are dealing with the terminal illness or the death of a business owner.
Changing a Dormant Company Status
When you want to revert to trading under your dormant company name, you’ll need to inform HMRC of your change of status from “dormant” to “active” within three months of trading. You can do this by signing in to your online HMRC account and changing your company to “active for Corporation Tax”.
For a company that has been registered as dormant from its launch, a registration for Corporation Tax is required. To do this you will need a company UTR number (Unique Taxpayer Reference).
What Information Is Needed to Update My Status?
When you use your dormant company to begin trading for the first time, you will need to supply HMRC with specific information so they can update their records:
- Full registered company name
- Company registration number (CRN)
- The start date of your business activities
- The main address where principal business activities are going to be carried out
- The nature of your business activities
- Your accounting reference date (ARD)
You must habitually ensure to record accurate business accounts, meet your filing obligations, and complete your tax returns each year. Should you need help with managing your business accounts, it would be wise to consult with an accountant who can take care of these tasks for you in a timely manner and subsequently avoid any harsh penalties.
What Are the Banking Requirements for a Dormant Company?
While you will need to have a separate bank account for your active company it is wise to NOT have a business bank account for your dormant company, particularly if it is to remain dormant indefinitely. Essentially, since dormant companies are not allowed to receive or spend any money, they don’t need a business bank account. Should your company spend or receive any money it will immediately cease to be dormant and will be classed as active for Corporation Tax purposes.
Conversely, should your previously active company switch to being a dormant company, you will need to close any business bank accounts associated with the company and avoid the consequential pitfalls.
Remember, even a minor action such as paying bank charges, or earning interest, will trigger a change of status from dormant to active.
Should you decide to start trading again, you can simply open up a new business bank account for your business. Until then you can pay for any costs associated with your dormant company through your own personal bank account.
You can launch a dormant company whenever you please, but you must ensure you contact HMRC and file the necessary details at Companies House on time. Although the details of what you submit will differ between active and dormant companies, you still need to submit dormant company files with the same diligence as an active company.
Do you want to find out more about dormant companies and learn how to change your company status? Contact our dedicated company formations team now for expert advice.