What is a Dormant Company? 1 (one) Powerful Tool To Consider

What is a dormant company? One powerful tool to help you take advantage of tax reliefs

Dormant companies are very common in business with thousands registered with Companies House but exactly what is a dormant company? Well there are many different situations where a company needs to be opened or kept open without actually trading but with potential filing requirements at both HMRC and Companies House the cost and administrative burden of doing so may be enough to put you off. Today we will look at how registering your company as dormant can help to ease this administrative burden and will explain exactly what is a dormant company.

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What Is A Dormant Company?

This actually depends who you are asking. HMRC define a company as dormant for corporation tax if it:

  • has stopped trading and has no other income, for example investments
  • is a new limited company that hasn’t started trading
  • is an unincorporated association or club owing less than £100 corporation tax
  • is a flat management company
To have stopped trading HMRC say the company cannot be buying, selling, renting property, advertising, employing someone or getting interest.
 
Companies House have a slightly different answer to the question what is a dormant company? They say that a company is dormant if it has had no “significant” transactions in the financial year. Significant transactions don’t include:
 
  • filing fees paid to Companies House
  • penalties for late filing of accounts
  • money paid for shares when the company was incorporated
Although these definitions are slightly different in reality the majority of small companies registered as dormant with HMRC are also registered as dormant with Companies House.

What Is A Dormant Company's Filing Requirements

When asking what is a dormant company? You should also ask why someone might want one and the answer is usually the reduced filing requirements that come with it. A dormant company may have reduced filing requirements with both HMRC and Companies House but to receive this benefit from the latter the company must qualify as small which we will explore in more detail below.

Once registered as dormant with HMRC a company will no longer need to pay corporation tax and will no longer need to submit a corporation tax return. This applies to companies of all sizes providing they meet HMRC’s definition of dormant.

If a company is considered both dormant and small in the eyes of Companies House then it will:

  • be able to file dormant company accounts instead of full accounts
  • not have to include an auditors report with the accounts
Just remember that for Companies House the filing requirement will only change where a company is both dormant and small. A company is considered small if it has any two of the following:
 
  •  a turnover of £10.2 million or less
  • £5.1 million or less on it’s balance sheet
  • 50 employees or less

What Are Dormant Company Accounts?

Dormant company accounts are a simplified version of the full statutory accounts most trading companies need to submit to Companies House. Since a requirement of being considered a dormant company is that there are no significant transactions there is no need to provide details of income and expenses. Instead small dormant companies will be able to submit an unaudited abridged balance sheet with certain notes to the accounts. 

Dormant accounts will usually be submitted via HMRC’s government gateway although there is an option to submit form AA02 for companies that have never traded which we will look at in more detail later in the article.

What Is A Dormant Company Used For?

A company may want to be considered dormant immediately after incorporation or even after many years of trading. There are lots of reasons for this but we have detailed some common examples below:

To secure a name for future use – many individuals start their businesses via the self-employed route with a view to incorporating at a later date. By forming a company and registering it as dormant a business is able to secure a name for future use whilst avoiding some of the usual statutory filing requirements that come with running a limited company like submitting a company tax return to HMRC and submitting full statutory accounts to Companies House.

To protect a businesses reputation – Companies House now have detailed guidelines to ensure no 2 limited companies names are too similar as this can cause confusion and can potentially be damaging for a business if a company with a similar name has a bad reputation. It would be easy for a potential customer to read a negative review for ABC Ltd and confuse them for ABC UK Ltd who have no negative reviews. Unfortunately there is no protection for unincorporated businesses so if your self employed business is trading as Creative Plumbing Solutions, another business could potentially register the limited company Creative Plumbing Solutions Ltd without Companies House flagging this up. It is for this reason that many unincorporated businesses will also register a limited company name and register the company as dormant.

Where there is a break in trading – Sometimes a company will stop trading for a period of time before recommencing at a later date. In this case where it is known the company will be needed again in the future it makes sense to keep the same company rather than closing down and reforming. This is especially true if a company has built up a good reputation under the current name. The company can be made dormant to cover the period where it is not trading and then have the trading status reactivated when required.

 

How To Make A Company Dormant

Once your company becomes dormant you will need to inform HMRC as soon as possible. For trading companies this can be done via the HMRC government gateway but if you have already received a notice to submit a corporation tax return then you will still need to submit the company tax return which will inform HMRC the company is dormant. If your company has never had a notice to deliver a tax return then you can inform HMRC via post or by phone instead.

You will not need to inform Companies House of the dormant status until the statutory accounts are submitted.

We are often asked what is a dormant company supposed to do with open payroll and VAT schemes? The answer is when making a company dormant it is also important to close down any VAT and payroll schemes that are running. This will include paying any outstanding liabilities to HMRC and employees (in the case of wages). For more information on VAT check out our article VAT rates registration and reporting – The full 20% VAT rate and more.

When closing down PAYE and VAT schemes it is a good idea to contact HMRC first as where the company is only expected to be dormant for a short period of time they may suggest keeping the schemes open and submitting nil returns. 

The official guidance for VAT states that a dormant company should deregister for VAT within 30 days of the company becoming dormant but if you plan to restart trading then you must submit nil returns in between.

The official guidance for PAYE states that if you do not plan to restart trading in this tax year then you should close your PAYE scheme.

Of course there are situations where the official guidance just isn’t practical and in our experience HMRC have always considered the circumstances of each situation. This is why we recommend contacting HMRC or a qualified professional before closing down the schemes.

How to Make A dormant Company Active

If your dormant company starts to trade again then you will need to inform HMRC as soon as possible. If your company has never traded in the past then you can do this simply by registering for corporation tax. If your company was previously registered for corporation tax before being made dormant then you can simply change the status of the company from dormant to active via the company’s government gateway.

If the company has deregistered for PAYE and VAT then it will also need to consider whether registration is required again.

There is no need to inform Companies House that the company is trading again as this will be apparent when the next set of accounts are submitted and they will automatically change the status accordingly.

Companies House Form AA02

For companies that have never traded since their incorporation and the only transaction is the initial issue of shares Companies House allow the submission of form AA02 which is simplified even further.  This form was previously known as the DCA (Dormant Company Accounts). One practical problem with form AA02 is that there can be no transactions made by the company which includes the payment of the confirmation statement fee which still needs to be paid to Companies House annually even as a dormant company. To get around this Companies House allow this transaction and any others relating to name changes and late filings etc to be excluded from the AA02 if the payment was made by a third party without any right of reimbursement.

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Newly Formed Companies

When you form a new limited company the company will automatically be considered dormant until HMRC and Companies House are told otherwise. So If you don’t plan to trade initially then there is no need to tell anyone although you would still need to meet the reduced filing requirements detailed above.

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