Understanding Dormant Companies: Definitions, Benefits, and Processes

Contrary to common perception, a dormant company isn't merely a closed entity. Certain rules dictate the ownership of a dormant company, which must be adhered to for proper classification.

Defining Dormant Companies

The interpretation of "dormant" varies depending on whether it's considered for Corporation Tax purposes under HMRC or for registration with Companies House.

Dormancy for Corporation Tax: This category encompasses companies that are:

No longer involved in trade and lack other income streams (like investments) Yet to commence trading Classified as an "unincorporated association" or a club with less than £100 Corporation Tax dues Functioning as a flat management company

Dormancy for Companies House: This involves a company registered with Companies House, which has experienced no "significant accounting transactions" throughout its financial year. "Significant accounting transactions" might pertain to transactions that ought to be recorded in a company's accounting records. However, such transactions are typically limited to:

Share payments Fees remitted to Companies House for name changes Company re-registration Submission of annual returns Settlement of penalties imposed by Companies House

The Motivation Behind Opting for Dormancy

Numerous factors can lead to a company becoming dormant either for Corporation Tax or Companies House. Surprisingly, it's more prevalent than perceived. For instance, one might establish a company solely to safeguard a brand name or trademark, for restructuring purposes, or for asset and intellectual property ownership.

Opting for dormancy can preserve the flexibility to recommence trading in the future, distinct from merely ceasing trade. An appealing aspect is the reduced filing responsibilities for dormant companies, easing the statutory obligations.

Informing Relevant Entities about Dormant Status

The onus falls on the company to notify relevant bodies of its trading status. This entails several steps when transitioning to dormant status:

Obligations upon a Dormant Company

While dormant companies aren't subject to Corporation Tax, informing HMRC of the dormancy is crucial. This notification prevents the continued submission of Company Tax Returns, averting penalties.

If working with an accountant, they can communicate the change to HMRC, or you can undertake the process online. The essential details to confirm include the company's name, its Unique Taxpayer Reference (UTR) number, and the cessation date of trading (if applicable). Alternatively, HMRC might notify you that your company could be treated as dormant, potentially exempting you from Corporation Tax and Company Tax Return filing.

Informing Companies House about Dormancy

Unlike HMRC, you don't need to inform Companies House immediately upon dormancy. Notification is required only when submitting a confirmation statement and annual accounts.

Necessity of Accounts Submission for Dormant Companies

Dormant companies – irrespective of whether they commence dormant or transition to it later – must submit an Annual Accounts statement and a confirmation statement to Companies House. Full accounts spanning the active period are needed if the company was active initially. However, dormant company accounts (simpler in nature) suffice for companies dormant throughout a complete accounting period.

VAT Registration for Dormant Companies

Dormant companies cannot register for VAT. If a VAT-registered company adopts dormancy, deregistration within 30 days of the status change is necessary.

Dormant Companies with Employees

Dormant companies employing individuals must settle any due wages before initiating dormancy and closing the PAYE scheme.

Duration of Dormancy

A dormant status can be sustained indefinitely, a valuable feature for safeguarding brand names or assets. However, minimal paperwork and related costs persist. Decisions regarding expense payment and document filing responsibility should be addressed.

Transitioning Dormant Companies to Activity

Should a dormant company intend to become active again, notifying HMRC within three months of reactivation is vital for Corporation Tax. For dormant companies, Companies House doesn't require notification of activity until annual accounts submission.

VAT registration might be necessary if turnover surpasses the VAT threshold.

A Dormant Company in the Context of Corporation Tax:

It no longer conducts business and lacks alternative income streams, such as investments. A freshly established limited company that hasn't initiated trading. An "unincorporated association" or club with a Corporation Tax liability of less than £100. A flat management company. A Dormant Company as Defined by Companies House:

This pertains to a company registered with Companies House that hasn't engaged in "significant accounting transactions" over its fiscal year. Such transactions may include those that should be recorded in the company's accounting records.

A dormant company for Companies House can be defined by limited transactions, encompassing:

Share payment. Fees for altering the company name paid to Companies House. Re-registration of a company. Submission of annual returns. Settlement of penalties imposed by Companies House.

Certain exceptions, such as specific financial firms, might need to file complete accounts regardless of company status.

Understanding Dormancy: Motives and Methods

Dormancy, either for Corporation Tax or Companies House, is adopted for various reasons. These include:

Safeguarding a brand name or trademark. Facilitating business restructuring. Holding assets or intellectual property. One key benefit is that reduced filing obligations alleviate the statutory burden for dormant companies. A crucial note: outstanding tax liabilities must be settled before a company can achieve dormant status.

Fulfilling Filing Requirements

Whether dormant from inception or transitioning later, every dormant company must meet specific filing criteria. Even as a dormant company, you're still obligated to submit annual accounts and a confirmation statement to Companies House. This applies regardless of whether dormancy pertains to Corporation Tax or Companies House.

Activating Dormant Companies

Transitioning an active company to dormancy entails informing HMRC of the change as soon as possible. This notification must occur within three months of dormancy initiation. Companies House need not be informed until it's time to submit annual accounts.

In cases involving employees, all pending wages must be paid, and the existing PAYE scheme closed.

Deregistering for VAT within 30 days of achieving dormant status is necessary. If dormancy is temporary and future trading is anticipated, submitting empty VAT returns during dormancy might be required.

Given that dormant companies are prohibited from handling money, closing business bank accounts can prevent income inflow.

Reactivate Dormant Companies

To reactivate a dormant company, notifying HMRC of the change to active status within three months of reactivation is crucial for Corporation Tax purposes. For dormant companies, Companies House notification of activity is only necessary upon annual accounts submission.

Consider VAT registration if the projected turnover exceeds the VAT threshold.