A dormant company is one that has been registered with Companies House but is not currently operating or receiving any form of income. This does not necessarily mean that the company has shut down, although it may well go through a period of being dormant whilst it is being wound up. Even where a company is dormant, the director(s) may still have ongoing compliance requirements to fulfil for both HMRC and Companies House, but these responsibilities will be at reduced levels compared to an actively trading business.
Why do companies become dormant?
There are several reasons why a business owner may want to keep a dormant company:
- Protect your name and reputation as a sole trader
Operating as a sole trader as opposed to a limited company can have some benefits such as lower accounting fees and less compliance admin to complete as there is no need to submit company tax returns. However, on the other side of things, one disadvantage is that there is nothing to stop someone else from using your name as the name for their limited company. Should a company with the same name attract negative attention or reputation, this can be mistakenly associated with yourself. Registering as a company with your name at Companies House can prevent this because there cannot be two companies with the same name. Many sole traders choose to set up a limited company with their name, but keep it dormant, so as to protect their trading name from being used by other businesses.
- Claim a business name whilst you prepare to launch
Similar to the reasons why a sole trader may want to protect their own name, those who are planning to set up a limited company may want to claim a specific name before another business does. Again, there is nothing to stop a business from using the same name as you would like unless it’s been registered with Companies House. Where you need time to set up your business or finalise plans, you may choose to register a company name and keep it dormant until a time when you’re ready to launch the business. The name would therefore be guaranteed to be available for your use once ready.
- Take an extended period of time out from the business
You may decide to make your company dormant if you need to be away from the business for a long period of time. There could be many reasons why you may want to do this, such as due to illness, for travel, maternity leave, a sabbatical or for any other purpose. By making the company dormant, it means you’ll be able to return and restart operations at any point in the future. During the dormant period, there will be significantly less tax and filing obligations to fulfil therefore requiring minimal attention.
- For holding freehold property
A dormant company status can be a useful vehicle for certain industries. It is particularly used for flat management where multiple leaseholders also own the freehold of the building. In this case, a dormant company can be set up to hold the head lease or freehold and directors can be easily changed when needed (usually when a unit or block changes hand to a new owner). This avoids having to change the Land Registry entry each time which requires more costs and administration than changing the names of directors for a limited company.
When is a company ‘dormant’?
The conditions as to when a company is considered to be dormant are different between HMRC and Companies House. As such, they will each have their own criteria on what makes a company dormant and what filing obligation is required from them. It also means that a company can be dormant under one organisation but not the other.
What HMRC defines as a dormant company
HMRC defines a dormant company as an entity that meets one of the following criteria:
- A newly incorporated company which has not yet started trading
- A company which has ceased trading and receives no form of income
- A company which never intends to trade because it has been formed to only hold assets such as land or intellectual property
- An unincorporated association or club owing less than £100 corporation tax
The term ‘trading’ is further defined by HMRC as:
- Buying and selling goods to make a profit or surplus
- Providing services
- Business activities such as marketing
- Earning interest
- Managing investments
- Receiving any other form of income
If HMRC deems your company to be dormant, you will receive a letter informing you that you no longer have to file a company tax return or pay corporation tax.
What Companies House defines as a dormant company
A company will be seen as dormant by Companies House where it has had ‘no significant transactions’ in the company’s financial year. This means that any type of payment or receipt of payment, no matter how small, will prevent a company from being dormant with Companies House. The only exceptions are where:
- A company has had to pay filing fees to Companies House
- A company has had to pay for late filing of accounts
- Money has been paid for shares when the company was first incorporated
How to make a company dormant
The first thing that needs to be done is to close down all business operations. This means clearing debts, including employees’ wages, suppliers accounts, directors’ salaries, shareholders’ dividends, and any other outstanding costs. You should next close down business bank accounts to prevent any transactions from occurring that will invalidate the company’s dormant status under Companies House.
Once this has been done, you can request to change the status of your company to dormant by informing HMRC. To do this contact your local Corporation Tax Office, either by post or phone. You may have to continue to complete a company tax return, even once you have told HMRC, in order to settle any outstanding corporation tax bills. Only once HMRC is satisfied that the company is dormant and confirms this status to you in writing can you stop submitting company tax returns.
As well as this, if you’re a VAT registered company and do not intend to trade again, you must deregister within 30 days of becoming dormant. However, if you plan to restart trading in the future, you must instead send ‘nil’ VAT returns whilst the company is dormant. You can cancel your VAT registration online but will need your Government Gateway user ID and password.
You do not need to inform Companies House that your company is dormant as you will still need to continue submitting confirmation statements and accounts. The type of accounts or what you need to include may change when your company is dormant depending upon the size of the company.
What to file with Companies House when your company is dormant
Unlike with HMRC, dormant companies will still have ongoing responsibilities to file with Companies House at the usual deadlines the company would have if it were actively trading. The only difference is that less information is required and how much you can omit varies depending on how big the company is. All companies must continue to submit confirmation statements. However, in general, so long as the company has had no significant accounting transactions and is therefore considered dormant by Companies House, they can claim exemption from providing an auditor’s report as per section 480 of the Companies Act 2006.
Filing Requirements for Small Companies
To qualify as a small company, at least two of the following must apply:
- A turnover of £10.2 million or less
- £5.1 million or less on its balance sheet
- 50 employees or less
Where this is the case for your dormant company you may submit ‘abridged accounts’ instead of full annual accounts. Abridged accounts contain a simplified version of the company’s balance sheet and profit and loss statement, as well as accompanying notes where necessary. Abridged accounts do not include a detailed breakdown of fixed assets, debtors and creditors. It means the corporation tax figure is not disclosed, making it impossible to estimate the net profit. The benefit of this is that not only is less financial information stored on Companies House which is publicly accessible, but the accounting fees will often be less as well.
Filing Requirements for Micro-Entities
Micro-entities are what Companies House class as very small companies and must meet at least two of the following criteria:
- A turnover of £632,000 or less
- £316,000 or less on its balance sheet
- 10 employees or less
Micro-entities are able to file even simpler accounts so long as they apply the FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime. It means only a simple balance sheet and necessary footnotes, signature of a director and basic profit and loss statement needs to be submitted to Companies House.
How to reactivate a dormant company
When you decide to reactivate a dormant company, you must notify HMRC within 3 months of any kind of business activity or receipt of income. You do this by reregistering for corporation tax. If your company has been dormant since incorporation, then you will need to register for corporation tax for the first time. Once you have done so, you’ll be able to set your accounting period so that you know when to complete your annual tax returns going forwards. You’ll also then be able to start filing accounts with Companies House from 9 months after your first year-end (this is all explained in how to complete a company tax return).
Once your company is reactivated and up and running, you may want to think about registering yourself as an employer and setting up PAYE in order to pay yourself a director’s salary as well as if you need to employ staff. The other thing to consider is whether or not you’ll also need to register for VAT. We particularly recommend doing this where you estimate your annual turnover to be near or over the £85,000 (however there are also other reasons you may want to register for VAT voluntarily whilst being under the threshold).
From this point onwards, you’ll need to keep accurate bookkeeping records in order to complete your annual company tax return and filing for both HMRC and Companies House. If you need help with either an active or dormant company then we’d be happy to support you with our company tax return service.