What is a Dormant Company, and What do I need to tell Companies House and HMRC.

Jan 28, 2024

Written by Greg Hanton. Greg is co-founder of Joy Pilot, No Worries Accounting, No Worries Red Umbrella, and Capital City Accountancy. He has over two decades of experience in providing tax and accounting support to contractors, especially those working in the UK. Greg holds a BE (Hons) in Chemical & Process Engineering from the University of Canterbury and a BSc in Chemistry from the University of Otago. He is also a Chartered Accountant (ACCA), member of AAT, and a Chartered Engineer (IChemE). With a passion for innovation and client-focused solutions, Greg continues to lead the charge in transforming the accounting landscape. See more on LinkedIn.

Updated on: Jun 18, 2024

There are times when our clients want to make their limited company dormant. This isn’t when they stop working through it for a few months, but rather they want to cease trading for an extended period of time, usually several years. In our experience this happens for two reasons (a) the contractor has taken up a full time PAYE roll but want to go back contracting through their limited company at some point in the future, or (b) they may or may not have traded through the company already but want to keep the company name for use at some point in the future.

For clients who want to keep their company dormant we offer a special light touch accounting service which is much cheaper than our normal monthly fee and ensures that we keep their statutory reporting up to date with Companies House and HMRC.

A dormant company is a business that isn’t actively trading, but still exists on the register at Companies House, effectively ‘asleep’ financially. In this guide, we explain how to maintain this status, fulfill necessary reporting requirements, and navigate the relationship with regulatory bodies. Discover the strategic benefits of keeping a company dormant and learn to avoid pitfalls that could awaken your sleeping enterprise.

Key Takeaways

  • A dormant company is a registered limited company that doesn’t engage in any trading activity, perform any business or generate any significant accounting transactions. It still needs to file annual accounts and a confirmation statement to Companies House to confirm its dormant status.
  • Dormant companies benefit from reduced administrative requirements, can be used to reserve a company name, and allow flexibility for future business activities without ongoing costs. Nevertheless, maintenance involves filing specific documents to Companies House and avoiding significant accounting transactions that would affect their dormant status.
  • Transitioning from dormant to active status requires notifying HMRC within three months, filing a standard set of annual accounts as opposed to dormant accounts, and updating company information like the registered office address and officer details. Failure to comply can result in penalties and the loss of dormant status.

Understanding Dormant Company Status

Dormant company status

When we think of businesses, we often envision bustling offices, busy production lines, or digital platforms buzzing with activity. Yet, there exists a category of companies that are the polar opposite – silent, inactive, and yet, purposeful. Welcome to the world of dormant companies. These companies, as defined by Companies House, remain inactive within a given financial year, not engaging in trading or recording ‘no significant accounting transactions’ during that period. Think of it as a hibernating bear, waiting for the right conditions to emerge.

Definition and Purpose

We can further break down the definition of a dormant company. Essentially, it is a registered limited company that remains inactive, not conducting any business activity or generating any income. The term ‘inactive’ is key in this context. It signifies that the company has no significant accounting transactions during the accounting period, as per Companies House’s criteria. This means the company must not carry out any business activities or have any other sources of income.

However, the dormant status of a company can vary depending on the perspective. For instance, the criteria for corporation tax purposes by the HMRC is different from the definition applied by Companies House. So the dormant status of a company depends on the perspective of the observer, but from the perspective of our limited company contractor clients the two are usually treated as identical.

Benefits of Dormant Status

Now, you might be wondering, why would anyone want to keep a company dormant? For starters, dormant companies benefit from reduced administrative requirements and are not required to have their accounts audited (obviously!) and the accounting work required is minimal.

But the advantages of a dormant company extend beyond cost savings. It provides a strategic advantage by:

  • Allowing the reservation and protection of a company name, thereby shielding a valuable business identity and reputation
  • Providing a business with the flexibility to remain inactive indefinitely while preserving the option to engage in future business activities or ventures

Companies House and Dormant Companies

Companies House and dormant companies

As we’ve seen, Companies House plays a critical role in the life of a dormant company. But what exactly is this relationship, and how does it work? To put it simply, a company is considered dormant by Companies House if it has not had any significant accounting transactions during the fiscal year. The key here is the term ‘significant accounting transactions,’ which we will delve into later.

The company must file annual accounts and send a confirmation statement to Companies House every year to maintain its dormant status. This process is akin to a yearly health check-up, confirming the company’s dormant status. This status can be maintained indefinitely, provided that the company continues to submit these annual filings on time.

Criteria for Dormant Status

So, what exactly are the criteria for a company to qualify as dormant? In the UK, a dormant company is one that is registered with Companies House but is not currently engaged in any trading activity. If a company has not carried out any ‘significant accounting transactions’ during the accounting period, it is classified as ‘dormant’ by Companies House. This designation indicates that the company has been inactive in terms of financial operations.

To clarify, a ‘significant accounting transaction’ refers to the transactions that must be recorded in the company’s accounting records. A company can claim dormant status if it does not carry out any significant accounting transactions during the accounting period. Significant transactions do NOT include (a) filing fees paid to Companies House, (b) penalties for late filing of accounts, (c) money paid for shares when the company was incorporated.

Companies House Requirements

Maintaining a dormant company involves more than just inactivity. It’s necessary to meet certain requirements as well. The law mandates all limited companies, including dormant ones, to file yearly accounts and a confirmation statement with Companies House. It’s the company directors’ legal responsibility to ensure the preparation and timely filing of the company’s accounts and confirmation statements.

But don’t worry, the task isn’t as daunting as it might seem. Dormant companies that are classified as ‘small’ can file ‘dormant company accounts,’ which are simplified and exempt from audit requirements. Filing dormant accounts is free of charge at Companies House, though delays can result in late filing penalties. So remember, it pays to be punctual when you file accounts!

HMRC and Dormant Companies

While Companies House has a major role in preserving a company’s dormant status, we should also consider the role of the HMRC. As the UK’s tax, payments, and customs authority, HMRC has a significant role in monitoring dormant companies, especially when they transition from dormant to active status.

This role involves tracking the company’s business activities and income sources. If a dormant company starts receiving income from trading activities or other sources, it must report this to HMRC and may need to pay Corporation Tax. This reporting process involves specific requirements and deadlines, which we’ll delve into later.

To help, the HMRC offer an online service to notify them when your company becomes dormant.

Filing Dormant Company Accounts

Filing dormant company accounts

One of the key responsibilities for a dormant company is to file dormant company accounts. Similar to an annual health check-up, this requirement aids in preserving the company’s health and status. Dormant companies must fulfill the requirement to file confirmation statements and annual accounts with Companies House at least once every 12 months.

Online Services and Templates

In this digital era, technology has made many aspects of business operations more efficient, including the filing of dormant company accounts. Companies House WebFiling service, also known as the Companies House online service, offers an online template for filing these accounts electronically, simplifying the process and minimizing errors through built-in checks. Not only is this service free, but it also has stringent deadlines to ensure punctuality and prevent late submission penalties.

With the ability to file dormant accounts online, the WebFiling service enables efficient submission of dormant accounts and confirmation statements, designed to ensure compliance with all necessary information for a successful filing.

Maintaining Dormant Company Compliance

Maintaining dormant company compliance

Though the idea of a dormant company may seem simple, ensuring compliance can be a delicate process. A dormant company must carefully avoid any significant accounting transactions to maintain its status. For instance, incidental expenses should be covered personally or by another company, rather than using the dormant company’s bank account.

But avoiding transactions isn’t the only requirement. Dormant companies must also ensure timely payment of any applicable fees to maintain compliance with the regulatory authorities. It’s all about balance – remaining inactive but not totally inert!

Avoiding Significant Accounting Transactions

To retain their dormant status, companies must navigate the tricky terrain of avoiding significant accounting transactions, including accounts money paid. These are activities such as:

  • settling an invoice
  • paying bank charges or interest
  • remunerating employees
  • paying dividends

If a dormant company fails to avoid engaging in any of these activities, it risks losing its dormant status.

So how can companies avoid these pitfalls? One strategy is to cover incidental expenses personally or have another company pay them, rather than using the dormant company’s bank account. Meanwhile, filing fees paid to Companies House, penalties for late filing of accounts, and money paid for shares when the company was incorporated are not considered significant transactions. It’s like walking a tightrope – one misstep can change the company’s status!

Restarting Business Activity: Transitioning from Dormant to Active

business reopened after being dormant

It is straightforward for a dormant company can transition to an active status and resume its business operations. This process involves:

  1. Notifying HMRC within 3 months of starting any business activity.
  2. If the company has traded in the past, the company can sign in to the HMRC account and register the company as ‘active’ for Corporation Tax.
  3. If the company hasn’t previously traded, it needs to register online for Corporation Tax. In both situations, the company’s Unique Tax Payer Reference (UTR) is required.

Reporting a Restart in Trading to Companies House

Restarting trading activities is a significant event in the life of a dormant company. The transition from dormant to active status at Companies House is communicated by the submission of standard annual accounts instead of dormant accounts. This switch serves as an indication of the change in status.

Updating Company Information

When a dormant company transitions to active status, it’s not just the trading activities that need to be updated. Companies must also update their registered office address, officer details, and SIC code at Companies House when restarting trading activities (if any of those have changed!).

These changes must be filed using appropriate forms. For instance:

  • A change of registered office address requires form AD01
  • Changes to director’s details require form CH01
  • If the company has a new trading address that is different from its registered office, this must also be updated with Companies House.

It’s like updating your details when you move house – it’s important to keep everyone in the loop!

Common Misconceptions: Dormant vs. Non-Trading Companies

Business jargon can often be perplexing. A common point of confusion is the difference between dormant and non-trading companies. While they might seem similar, they have distinct differences. A dormant company does not engage in any financial transactions, unlike a non-trading company which can have corporation tax obligations due to past business activities, despite current inactivity.

Non-trading companies can experience transactions related to prior business arrangements or liabilities, which is not the case for dormant companies. While dormant companies must file dormant accounts with Companies House, non-trading companies must file appropriate documents with HMRC. So, while they might seem similar at first glance, dormant and non-trading companies are different in many ways.

Key Differences

Digging deeper into the differences between dormant and non-trading companies, we find that a company can retain its dormant status for Companies House purposes, even when it does not qualify as dormant according to HMRC’s standards for Corporation Tax.

Moreover, dormant companies frequently serve the specific purpose of holding assets like freehold property or intellectual property without engaging in any active business or trading operations. In contrast, non-trading companies might have assets or liabilities resulting from past business activities. Therefore, while both types of companies may appear inactive, their status, as well as their obligations and potential liabilities, can significantly differ.

Potential Pitfalls and Penalties

As with any journey, maintaining a dormant company can have its potential challenges and penalties. Dormant companies in the UK are subject to late filing penalties if they do not file their accounts with Companies House on time. The penalties for private limited companies filing late are scaled based on the delay:

  • Up to 1 month late incurs a £150 fine
  • 1 to 3 months late incurs a £375 fine
  • 3 to 6 months late incurs a £750 fine
  • Over 6 months late results in a £1,500 fine.

If a company files its accounts late for two consecutive years, the fine imposed is doubled. Beyond financial penalties, companies risk being fined and potentially struck off the register for failing to submit accounts or a confirmation statement to Companies House. It’s a clear reminder that failures to comply can lead to serious consequences!

Losing Dormant Status

The path of a dormant company can have its potential challenges, with the loss of dormant status being one of the most significant. A UK dormant company loses its dormant status with HMRC if it starts receiving income from trading activities or other sources, such as rental income.

A company is not considered dormant if it holds assets capable of generating income, profits, or chargeable gains, including intellectual property. Receiving donations causes a dormant company to lose its dormant status, regardless of the purpose or destination of these donations, or the account in which they are deposited.

A company also forfeits its dormant status following the sale of any of its assets due to the generation of proceeds from such a sale. Therefore, retaining dormant status requires careful planning and management.

Summary

Dormant companies provide a way to protect a company’s name, shield its identity, and offer flexibility for future ventures. However, managing a dormant company involves navigating a complex landscape of regulatory requirements, potential pitfalls, and penalties. From filing dormant accounts with Companies House to avoiding significant accounting transactions, the journey requires careful planning and execution. But with the right approach and knowledge, dormant companies can serve as a valuable tool in the business world, holding potential for future opportunities.

Frequently Asked Questions

What is the meaning of dormant company?

A dormant company is one that has been incorporated but is not engaged in any business activity or earning income.

What is a dormant company in the eyes of HMRC?

A dormant company in HMRC refers to a company that has been registered with Companies House but is not engaging in any business activities or earning income. This type of company is considered dormant for Corporation Tax purposes.

How long can a company stay dormant?

A company can stay dormant for an indefinite period, but it must fulfill certain obligations, such as filing annual accounts with Companies House, once registered as dormant.

Do I need to file dormant accounts with HMRC?

No, once you’ve informed HMRC that your company is dormant, you don’t need to file dormant accounts or pay Corporation Tax unless you receive a further notice to deliver a Company Tax Return.

What are the benefits of a dormant company?

The benefits of a dormant company include reduced administrative requirements, cost savings on detailed accounts and auditing expenses, the ability to reserve and protect a company name, and the flexibility to remain inactive while preserving the option to engage in future business activities. In summary, dormant companies offer various advantages for long-term planning and cost management.

What if my dormant company is registered for VAT?

Should you have no plans to resume trading, you are required to cancel your VAT registration within 30 days after your business becomes inactive. Conversely, if you anticipate recommencing trade, it is mandatory to submit ‘nil’ VAT returns during the period that your company is dormant.

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