There is a secret state of being for closed-yet-not-defunct businesses: the realm of the dormant company. But "dormant" doesn't equal "dead." A dormant company is not a non-business. There are rules, regulations, and responsibilities governing this unique state. Think of it as a hibernation mode for your business, one with specific maintenance requirements.

At Your Company Formations, we are here to shed light on the world of dormant companies. In this blog, we aim to answer your burning questions.

What is a dormant company?

Dormant company definitions differ for HMRC and Companies House. HMRC focuses on trading status and income, while Companies House considers accounting activity. Understanding these distinctions is crucial for complying with tax and filing obligations.

From a Corporation Tax perspective for HMRC, a dormant company meets one of the following criteria:

• Ceased trading: No ongoing business activity or additional income streams like investments.
• Pre-trading: Newly registered yet to commence operations.
• Unincorporated clubs: Associations or clubs owing less than £100 in Corporation Tax.
• Flat management companies: These are responsible solely for managing flats within a building.

For Companies House purposes, a dormant company refers to one that hasn't conducted any significant accounting transactions during its financial year. These transactions encompass any activity requiring recording in your accounts but are limited to:

• Share purchases
• Company name change fees
• Company re-registration costs
• Annual return filings
• Penalties paid to Companies House

Why would I make my company dormant?

Dormant status offers a valuable middle ground for UK companies facing temporary pauses or strategic shifts. Various scenarios prompt dormancy, from brand protection and holding assets to facilitating restructurings.

Unlike full closure, dormancy preserves the option to resume trading later, providing valuable flexibility quickly. Moreover, HMRC and Companies House recognise dormancy, granting relief from specific filing requirements and easing your administrative burden during this period.

For short-term hiatus or deliberate restructuring, embracing dormancy can present a strategic advantage for your UK business.

Who do I need to tell if my company is dormant?

Maintaining accurate records for a dormant company involves informing the relevant authorities. Here's what you need to know:

HMRC: While dormant companies are exempt from Corporation Tax, informing HMRC is crucial. You can do this online or via an accountant, providing the company name, UTR number, and trading cessation date (if applicable). Alternatively, HMRC may proactively flag your company as dormant, negating future tax returns and penalties.

Companies House: Unlike HMRC, notification isn't immediate. You will inform them when filing the following confirmation statement and annual accounts. Regular accounts are required for active periods, while simplified "dormant company accounts" suffice for full dormancy.

Remember, timely communication with both bodies ensures compliance and avoids unnecessary penalties. Consulting an accountant can offer valuable guidance in navigating these procedures.

Can dormant companies be VAT registered?

The intersection of VAT registration and dormant company status necessitates a clear understanding of their distinct implications.

Dormant Companies and VAT Deregistration:

By definition, a dormant company ceases trading activities and lacks taxable supplies. Consequently, dormant companies cannot be VAT-registered. However, if your previously VAT-registered company becomes dormant, prompt action is required:

• Deregister for VAT within 30 days: Failure to do so can incur penalties and complicate future re-registration.
• Submit nil VAT returns: If your company becomes dormant within a VAT period, you must still submit a nil return for that period.

Maintaining Compliance:

Navigating VAT obligations during dormancy demands vigilance. Ensure you:

• Keep accurate records: Maintain financial records to demonstrate the absence of taxable activity during dormancy.
• Communicate effectively: Inform HMRC of your dormant status and potential deregistration promptly.
• Seek professional guidance: Consult a qualified accountant for tailored advice on managing VAT throughout dormancy and potential future trading resumption.

Remember, VAT regulations can be intricate. Proactive communication with HMRC and expert guidance ensures compliance and avoids unnecessary complications during your company's dormant phase.

Managing the Employment Aspect of Dormant Companies

When transitioning your company to dormant status, employee considerations require careful attention. Here is what you need to remember:

Wages and Termination:

• Fulfil all outstanding wage obligations: Ensure all earned wages are paid to employees before declaring dormancy. Failure to do so constitutes a breach of contract and may have legal ramifications.
• Follow proper termination procedures: If dormancy necessitates employee termination, comply with all contractual notice periods and severance agreements. Consult legal counsel for guidance on adhering to employment and redundancy laws.

PAYE Scheme Closure:

• Contact HMRC: Inform HMRC of your company's dormant status and your intention to close the PAYE scheme. This should be done promptly to avoid incurring penalties for late communication.
• Finalise final payroll: Submit the final PAYE return and settle any outstanding tax liabilities related to employee earnings.

Maintaining Records:

• Retain employee documentation: Securely store all employment contracts, payroll records, and termination documents for the required legal retention period. This ensures compliance with HMRC and potential future employee inquiries.

How long can a company remain dormant?

UK-limited companies enjoy the unique advantage of indefinite dormancy. This flexibility benefits various scenarios, such as holding valuable assets, securing brand names, or undergoing strategic restructuring.

While dormancy offers tax relief, some administrative responsibilities remain. These include:

• Filing confirmation statements and annual accounts with Companies House.
• Appointing a responsible person to fulfil statutory filing obligations.
• Covering the associated filing fees.

How Do You Reactivate a Dormant Company?

The process of restarting a dormant company is generally straightforward:

• Register or re-register for Corporation Tax with HMRC within three months of resuming trading.
• Submit annual accounts to Companies House, including dormant accounts for full dormancy periods.
• Consider VAT registration if anticipated turnover exceeds the threshold.

You do not need to inform Companies House immediately when your company becomes active again, as this will become clear when you submit your annual accounts.

Conclusion

Navigating the intricacies of dormancy and reactivation can be complex. Seeking advice from an accountant ensures smooth transitions, minimises administrative burdens, and avoids potential legal or financial pitfalls.

UK businesses can confidently utilise this tool for strategic flexibility and future growth by understanding the benefits and obligations associated with dormancy.

Further suggested reading:

Are you confused about SIC codes and their uses? Discover more by reading our post, What is a SIC Business Code?

Are you thinking of adding shareholders? Read our post, All You Need to Know About Limited Company Shareholders, for more information about their role in your business.