Even if a company is dormant, there are still a number of filing and reporting obligations that arise in relation to both HM Revenue and Customs (HMRC) and Companies House. As a business owner, it’s therefore important to know what these obligations are and when these arise, to ensure compliance at all times, regardless of whether the company is actively trading.
What is a dormant company?
A company may be classed as ‘dormant’ if either it hasn’t yet started trading or is no longer doing business, and doesn’t have any other income, such as investments.
Dormant is a term that both HMRC and Companies House use for a company that isn’t active, trading or carrying on business activity, although it means slightly different things in the context of Corporation Tax and company tax returns for HMRC, and annual accounts for Companies House.
In effect, this means dormant status has different interpretations, depending on the viewpoint, where a company may have dormant status for Corporation Tax purposes, but may not meet the stricter definition applied by Companies House.
Dormant for Corporation Tax purposes
There are various scenarios in which HMRC would generally consider a company not to be active for Corporation Tax purposes. A company can be dormant either from the moment it’s formed or, alternatively, an existing trading company might become dormant.
A company is usually dormant for the purposes of Corporation Tax if it:
- is a new limited company that hasn’t yet started trading
- is an existing company that has previously been trading, but is no longer doing so, and
- has no other sources income, such as investment income
- is an unincorporated association or organisation, such as a members’ club, owing less than £100 Corporation Tax for an accounting period, even if it’s active or trading, and the club or organisation is exclusively for the benefit of its members
- is a flat management company, sometimes called a ‘right to manage’ company, set up so residents can jointly run a property, for example, a block of flats.
In contrast, HMRC may consider a company to be ‘active’ for Corporation Tax purposes when it’s engaged in any kind of business activity, for example, carrying on a trade or profession, buying and selling goods and/or services with a view to making a profit or surplus, earning interest, managing investments or receiving any other form of income.
Once a company is considered to be dormant by HMRC, it will be exempt from the requirement to file annual tax returns and pay Corporation Tax during any non-trading period, unless and until it starts trading again or closes down. A limited company can be kept dormant indefinitely, although this may be subject to review by HMRC.
Dormant for Companies House purposes
All limited companies, whether they actively trade or not, must submit annual accounts and a confirmation statement, previously an annual return, to Companies House each year. This means that even if a limited company is dormant for Corporation Tax purposes, it must still meet these annual filing obligations with Companies House. However, the nature of the accounts that will need to be filed will depend on whether or not the company is ‘dormant’ for Companies House, which employs a more rigorous ‘dormant company’ definition than HMRC.
A company will be classed as dormant by Companies House if it’s had no ‘significant accounting transactions’ that would normally be reported in the accounting period. A significant transaction is one that a company should enter in its accounting records, but doesn’t include filing fees payable to Companies House, penalties for late filing of accounts or money paid for shares when the company was incorporated.
Provided a company hasn’t had any significant transactions during the relevant financial period, the company can have dormancy status, in this way reducing the statutory burden on the company. This is because a company that is classed as dormant by Companies House may be exempt from audit and, as such, will not be required to file full audited accounts.
However, a dormant company should not be confused with a non-trading company. A company that is non-trading, or not carrying out any business, may nevertheless be involved in other day-to-day financial transactions, where costs such as rent, wages, bank charges or legal fees must be reflected in the company’s accounting records. In these circumstances, the company will not be considered a dormant company for the purposes of Companies House.
How to register a company as dormant
A limited company is technically dormant from the day the company is incorporated at Companies House to the day before it starts trading. For this initial period when the company remains inactive, regardless of how long, there are no requirements to file annual accounts or tax returns with HMRC. However, as Companies House directly informs HMRC when a new business is incorporated, HMRC will assume that the company has been trading from the outset unless otherwise informed, so steps must be taken to notify HMRC of the company’s dormant status. Once a company has started trading, the company’s directors must also inform HMRC of this fact within a period of three months and register for Corporation Tax.
When a company has previously traded but has subsequently stopped, and HMRC forms the view that this is now a dormant company, it may write to the company proposing to treat the company as dormant, such that there is no longer any obligation to file annual tax returns or pay Corporation Tax. HMRC generally considers a company to be dormant if it’s no longer carrying out any business activity. Alternatively, the company directors can notify HMRC in writing that the company has stopped trading and has no other income, and is therefore dormant for tax purposes. Upon receipt, HMRC should send written notification to the company’s registered office address confirming acceptance of dormancy status.
If the dormant company was previously trading, HMRC will also send a ‘Notice to deliver a Company Tax Return’. This must be completed for the tax accounting period prior to the company becoming dormant and submitted to HMRC online. Any outstanding Corporation Tax must also be paid. However, other than this tax return, the company should have no further obligations to HMRC until it recommences trading or closes down.
It’s the responsibility of the company directors to inform HMRC of any changes to the trading status of the company, although an accountant can do this on the company’s behalf. The directors must inform HMRC if a company becomes dormant, otherwise the company will be assumed to be trading, and all the tax filing requirements will remain in place. Any failure to inform HMRC that a company is dormant and to file a Corporation Tax return may result in penalties being raised against the company.
In contrast, the directors are not under any obligation to notify Companies House when a company becomes dormant, but they will still have to file annual accounts and a confirmation statement each year. By submitting annual accounts, this is the way in which Companies House is informed of a company’s dormancy status, where any failure to meet the annual filing obligations with Companies House can also result in a fine and, in the event of a serious breach, lead to the company being struck off the Companies Register.
When to file dormant accounts with Companies House
If a company has never traded, where it has been dormant since incorporation, then simplified dormant accounts can be filed. If a company has previously traded, it may still be able to file dormant accounts if the company is classed as both ‘small’ and ‘dormant’ by Companies House. A set of thresholds are prescribed by legislation to determine the size of a company. To be classed as ‘small’, a company must satisfy two or more of the following size requirements:
- a turnover of no more than £10.2 million
- £5.1 million or less on its balance sheet
- 50 employees or less.
If a company is entitled to submit dormant accounts, it can:
- use the exemption so the company’s accounts don’t need to be audited
- send abridged accounts to Companies House, and
- choose whether or not to send a copy of the director’s report and profit and loss account.
However, even though unaudited dormant accounts are much simpler than accounts for a trading company, they must still contain:
- an abbreviated balance sheet with statements above the director’s signature and printed name to the effect that the company was dormant during the accounting period
- any previous year’s figures for comparison, even though there are no items of income and expenditure for the current year
- certain prescribed notes to the balance sheet.
The same time is allowed to file dormant accounts as for other accounts although, equally, the same late filing penalties apply to these accounts.
How do you restart a dormant company?
A new company will no longer be dormant once it starts trading or, for an existing company that previously stopped trading, once it starts carrying out any business activity again.
If a company has started trading for the first time, it must be registered online with HMRC for Corporation Tax. For an existing company that has restarted trading, the company directors must notify HMRC within three months of carrying on any kind of business activity or receiving any form of income. Once a dormant company has become active again, it will also need to be re-registered for Corporation Tax.
There is no need to immediately notify Companies House when a company restarts. This is because notification of its’ active trading status will be provided when the next set of annual accounts are filed, as these will show that the company is no longer dormant. As the company directors should already have been sending annual accounts to Companies House during the period of dormancy, the reporting dates will stay the same.
Take professional advice
It’s always best to seek expert advice if a decision has been made for a company to cease trading and become dormant. This is because it’s important to understand the distinction between the meaning of a dormant company for HMRC and Companies House, the ways in which a company can lose dormancy status and the steps that can be taken to avoid this from happening. For example, where a company bank account is kept open, unexpected charges or interest will still be classed as a ‘significant transaction’ by Companies House.
Further, before declaring a company as dormant, all outstanding bills should be paid, including shareholders’ dividends, directors’ salaries, employees’ wages, direct debits for service providers and all accounts with suppliers. If the business is owed any money, arrangements should be made for these accounts to be settled. Any PAYE scheme may also need to be closed and the company de-registered for VAT. This process can be complicated, so having expert advice and assistance can help company directors to safely navigate a way through this.
It’s also important to know precisely what steps need to be taken before restarting a dormant company, including how and when to file your next company tax return with HMRC.
Dormant company FAQs
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Legal disclaimer
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert professional advice should be sought.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
