What is a Dormant Company? Have you just started your business in the UK? If so, you must understand certain business terminology to navigate the business landscape effectively. Dormant business is one such term that you’ll often come across. But what exactly does it mean? In this blog post, we’ll help you understand what a dormant company is, the reasons for maintaining dormant accounts, and how it is important to your business. 

Dormant Company Meaning

A dormant company is a legally existing business that doesn’t trade. It is like an inactive business. The enterprise is registered yet no longer making any income. This status can be helpful in some cases.

Why Do Companies Become Dormant?

There are many reasons why companies might become dormant. Here are some common reasons:

• Protecting a trading name to prevent it from being registered by another business
• Decisively halting business due to travel, illness, or any other reason
• No active trading, just holding assets
• Reserving a company name while preparing for future business endeavours

Understanding these reasons can help you determine whether dormancy is necessary. Additionally, a company can remain inactive or dormant for as long as it wants to. However, business owners must notify HMRC as early as possible to maintain a number of statutory obligations required for Companies House. 

Before going dormant in business, it’s essential for business owners to speak to professional accountants like TaxCan and Cangaf Ltd, as they can help in wrapping up effectively and legally. This involves filing annual confirmation statements and dormant company accounts, updating any changes to your company’s details, and maintaining accurate statutory records that are accessible for public inspection.

Is Trading Allowed for Dormant Companies?

A dormant company must refrain from engaging in any trading activities or generating income. This includes:

• Purchasing or selling goods and services
• Leasing or acquiring property
• Hiring employees
• Paying directors’ salaries
• Managing investments and receiving dividends
• Issuing dividends to shareholders
• Earning interest or incurring bank charges
• Paying for legal or accounting services from the business account

If a dormant company is involved in any of these activities and has any ‘significant accounting transactions’ since the end of the previous accounting period, it will lose its dormant status and will need to prepare comprehensive statutory accounts. In simple words, there should be no inflow or outflow of funds from the company to maintain business dormancy.

How to Make a Company Dormant?

To register a new company or change the status of an existing company from active to inactive/dormant, you must notify HMRC’s Corporation Tax office in written form. Be sure to specify the date from which the company will be considered dormant.

You can find HMRC’s contact details on any official letter sent to your registered office address, or you can look them up online.

You should receive confirmation of the dormant status at your registered office within about 15 days.

If your company was previously trading, HMRC will send a ‘Notice to Deliver a Company Tax Return,’ which needs to be completed for the Corporation Tax period before the company goes dormant. This return should be submitted online to HMRC, and any Corporation Tax due on profits earned during that period must be paid. Additionally, you should close your payroll and cancel your VAT registration if applicable.

Before declaring your company dormant, make sure all outstanding bills are settled, including directors’ salaries, employees’ wages, shareholders’ dividends, direct debits for services, and supplier accounts. Any money owed by clients should also be collected.

Once you have completed these steps, you won’t need to contact HMRC again until your company starts trading again. 

Informing Companies House of Dormant Status

You are not required to inform Companies House when your company becomes dormant. However, you must still submit a confirmation statement (formerly known as an annual return) and dormant accounts each year.

Submitting these annual accounts is how Companies House will be made aware of your company’s dormant status.

Understanding Dormant Account Meaning

It’s advisable not to open a business bank account if your business is dormant. If your company was previously trading, consider closing any existing business bank accounts to prevent bank charges or unexpected payments, which could put your dormant status at risk.

Instead, it is advised to make any incidental or occasional payments from a personal bank account.

A dormant company can only conduct specific transactions through its business bank account:

• Payments for shares from the initial shareholders
• Fees to Companies House for filing a confirmation statement or changing the company name
• Late filing penalties to HMRC

Any other payments, whether made or received, are considered ‘significant accounting transactions.’ These transactions would cancel the dormant status and require the submission of full statutory accounts.

Filing & Reporting Requirements for Dormant Companies 

For Companies House

Dormant companies must file dormant accounts and confirmation statements with Companies House annually.

Dormant accounts should include a balance sheet and any necessary notes. These can be submitted by post or online using form AA02. The filing deadline is 9 months after the end of the financial year, known as the ‘accounting reference date.’

For a company’s first accounts covering a period longer than 12 months, the deadline is extended to 21 months from the incorporation date. Companies House will send reminders as the filing date approaches, but it’s a good idea to set up your own reminders as well.

The annual confirmation statement verifies key company details as of a specific date, including:

• Company name
• Registered office address
• SAIL address (if applicable)
• Directors’ details
• Company secretary details (if appointed)
• Shareholders’ details
• Location of statutory company records
• Information about issued shares
• Nature of business activities (SIC codes)
• Details of people with significant control (PSCs)
• Registered email address

The first confirmation statement is due 12 months after incorporation, and subsequent statements are due 12 months after the date of the previous one.

There is no limit on how many confirmation statements you can file each year. The key is to keep the public register accurate and current.

Additionally, dormant companies must ensure that their statutory records are current and accessible for public inspection at the registered office or SAIL address. Any changes to the company’s registered details must be reported to Companies House promptly to keep the public record updated.

For HMRC

If a company has been dormant since its incorporation, it is not required to file tax returns with HMRC until it becomes active again. However, if the company was trading for any part of an accounting period before going dormant, it must submit a Company Tax Return.

After notifying HMRC that your business has ceased trading, you will receive a ‘Notice to Deliver a Company Tax Return.’ This return must cover the period when the company was active and determine any Corporation Tax liability.

Beyond this tax return, the company does not have any further obligations to HMRC until it either resumes trading or is officially dissolved. 

Tax Obligations for a Dormant Company

Dormant companies are not required to pay any tax until they resume trading. However, if the company was trading before becoming dormant, it must settle any outstanding tax liabilities from that period with HMRC.

How do you restore the active status from Dormant?

When you’re ready to reactivate your dormant company, you must contact HMRC within 3 months of resuming any business activity or receiving income.

If your company has never traded before, you need to register for Corporation Tax online. This involves creating a Government Gateway account and providing the following information:

• Company name
• Company number
• Date your company became active (this marks the start of your accounting period for Corporation Tax)
• Address where principal business activities are conducted
• Standard Industrial Classification (SIC) code (indicating the nature of your company’s main business activities)
• Accounting reference date (ARD) (the date up to which your company accounts will be prepared)

HMRC will update their records with this information and determine your company’s accounting period for Corporation Tax. This period will run from the start of trading until the ARD of your company’s annual accounts.

You will receive a letter at your registered office detailing your deadlines for paying Corporation Tax and filing Company Tax Returns. To meet these obligations, ensure that your business and accounting records are accurate and up-to-date.

You can also a professional accountant or tax advisor to assist with these matters.

If your company employs staff, you’ll need to register as an employer and set up PAYE. Additionally, if your annual turnover is expected to exceed £90,000 (the VAT registration threshold from 1 April 2024), you will need to register for VAT.

There is no immediate requirement to notify Companies House when your company becomes active. You will update Companies House on its active trading status when you file the next set of annual accounts.

Can a Dormant Company Be a Shareholder or Guarantor of Another Limited Company?

Yes, a dormant company can be set up to act as a shareholder or guarantor for another company. This arrangement allows the dormant company to commit a certain amount of money towards the other company’s debts in case of insolvency.

To keep its dormant status, the company must avoid any ‘significant accounting transactions.’ If the dormant company is only serving as a shareholder or guarantor, it typically won’t need to record any transactions. For instance:

• If you create a dormant company limited by shares, the value of the shares can be set to the amount you guarantee to contribute to the other company’s debts.
• If you establish a dormant company limited by guarantee, the guaranteed amount can be set to match the sum you promise to contribute towards the other company’s debts.

The initial payment for shares or guarantees is not considered a significant accounting transaction, as these amounts are fixed at the time of incorporation.

However, if the dormant company receives any payments for its role or if its directors or members receive income, the company will lose its dormant status.

Seek Professional Assistance for Maintaining or Restoring the Dormant Status of Your Company in the UK

Understanding and managing a dormant company requires careful attention to compliance and reporting requirements. For expert guidance on maintaining or restoring dormant status, consider reaching out to Cangaf Ltd. Our professional advice ensures all statutory obligations are met efficiently, helping you understand the complexities of dormant company regulations seamlessly.

Contact Details:

CANGAF Accountants
235 Tonge Moor Road, Bolton BL2 2HR
Email: info@cangafltd.com
Phone: 01204 859315

Let CANGAF Accountants manage your finances while you focus on excelling on the pitch.