All You Need to Know About a Dormant Company

The Definition of a Dormant Company

A company is dormant if it is inactive and not trading (including receiving any form of trading income). However, the company must be registered with Companies House and can remain dormant from its trading or incorporation date.

What Are the Advantages of a Dormant Company?

There are a number of favourable factors to having a dormant company:

• Secure your company name: A popular reason for choosing to have a dormant company is to secure your company name at the earliest in order to prevent any other potential business owner using your desired name. This can be decided during the business-planning stage even though your company may be months or years away from an official launch.

• Prepare a restructure: A dormant company may help you prepare for a whole company restructure or section of your business.  However, your dormant status will be lost once the company begins trading.

• Own your intellectual property: A dormant company may be the right place to hold your intellectual property or company assets.

• Deal with the ill-health of a business owner: Having a dormant status can be a helpful move for companies dealing with the terminal illness or death of a business owner.

What Are the Trading Implications of a Dormant Company?

A dormant company is not permitted to trade or earn income from:

• The purchasing and sales of goods and services
• Leasing/buying properties
• Staff employment
• 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

However, a dormant company may indulge in certain transactions, including:

• 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 Are the Tax Implications of a Dormant Company?

If your company has ceased trading and receives 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 have not yet begun trading
• You are an unincorporated association/club owing less than £100 Corporation Tax
• You are a flat management company

HMRC may deem your unincorporated company to be dormant for specific Corporation Tax reasons if it remains active but abides by 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 every year your company is dormant, you cannot have any of the following:

• Permitted trading losses for which it may want to claim relief
• Assets likely to be disposed, which would give rise to a chargeable gain
• Tax deductible interest/annual payments (payable to HMRC)

However, your company will not be considered dormant by HMRC if the following applies:

• You are a privately-owned club run by its members as a commercial enterprise for profit
• You are a housing association or you’re a registered social landlord (as designated in the Housing Act 1986)
• You are a trade association
• You are a thrift fund
• You are a holiday club
• You are considered to be a “friendly society”
• You are a subsidiary of, or is wholly owned by, a charity

When HMRC considers your company to be dormant, you will receive a notification stating that you are exempt from Corporation Tax and not permitted to file Company Tax Returns.  

What Are the Implications of a Dormant Company Relating to Companies House?

As stated, as long as you have no significant accounting transactions during the financial year and you’re registered at Companies House, your company may be considered to be dormant.

However, the transactions must 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

Notably, you must still file your annual accounts and confirmation statement with Companies House even if your limited company is dormant for Corporation Tax.

What If I Have a Small Company/Micro-entity?

If your company qualifies as “small”, you can file “dormant accounts” without having to include an auditor’s report in your accounts.

According to the GOV.UK website, your company will be considered “small” if it meets any of the following points:

• Your company has a 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 your decision 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 can only be sent if all of your company members agree. It’s worth noting that an abridged account indicates that less information of your company will be available to the public from Companies House.

Your company is considered a “micro-entity” if any of these points are met:

• 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)

Micro-entities can prepare accounts that adhere to minimum statutory requirements (Companies House only requires a basic balance sheet with less information). Moreover, micro-entities may also benefit from similar exemptions given to small companies. 

However, adhering to your small company’s (or micro-entity) Company Tax Return, statutory accounts have to be sent to both your members and to HMRC.

What Are the Banking Implications of a Dormant Company?

It’s not wise to have a business bank account for your dormant company as there’s a chance it may remain dormant and will not be permitted to receive trading income. Note, if your company spends or receives money, it will instantly lose its dormant status.  Even minor actions such as paying bank charges, or obtaining interest, will trigger a change in status from dormant to active.

Whenever you decide to restart trading, you simply need to open a new business bank account. Until that moment, you should pay for any associated costs with your dormant company through your personal bank account.

Remember…

There are a number of reasons why you may opt for having a dormant status: protecting your brand name, preparing a restructure, owning intellectual property, and/or dealing with owners with ill health.

However, even if though your company can become dormant at any point, you have to ensure you contact HMRC and file the necessary details at Companies House in a timely manner. Additionally, if you wish to go back to a trading company under your dormant company name, you have to tell HMRC of your status change within three months of trading. This can be done by signing in to your online HMRC account and amending your company to “active for Corporation Tax”.

To find out more about a dormant company, or for more information about obtaining a registered office address, contact Your Virtual Office London, today.