The key facts about dormant companies

When you hear the word ‘dormant’ you might think of plant seeds waiting for the right conditions or a sleeping volcano. A dormant company is similar because it exists but is currently inactive. Legally, a dormant company doesn’t trade or generate income, even from investments. 

 

Making your limited company dormant rather than closing down means you have the option to trade again in the future without setting up a new limited company. There's no time limit on how long you can keep it dormant. Here are some things you should know. 

 

For Corporation Tax, a company is treated as dormant if it has ceased trading and doesn’t have any other sources of income. A new limited company that hasn’t started trading is technically dormant too. 

 

HMRC classifies a company as dormant for Corporation Tax purposes if it remains inactive for the whole financial year. This applies to companies that: 

• aren’t involved in any business activity (trading) 

• don’t generate other income, such as investments. 

 

Companies House considers a company as dormant if there haven’t been any ‘significant’ transactions during the financial year. The only exceptions are for payments such as filing fees or for shares during the company’s incorporation. 

 

If your company is dormant it’s important to follow the right filing requirements to avoid non-compliance penalties. Even dormant companies must file accounts with Companies House each year. 

 

So, there’s a difference between the definition of ‘dormant’ for Corporation Tax purposes and at Companies House. It’s about the end of trading and absence of income versus a lack of ‘significant’ transactions in the financial year. 

 

If your company hasn’t received any income, for example from investments, and has not had any ‘significant’ accounting transactions you should file dormant accounts. 

 

‘Significant’ transactions. Filing fees for Companies House or penalties for late filing aren’t included, but anything else probably is. 

 

Financial year. A company could stop trading during its financial year, rather than at year-end. However, filing can only take place after a full financial year without ‘significant’ transactions. After that, if the company doesn’t maintain its dormant status, penalties and additional reporting requirements could follow. 

 

Even small financial activities could change your company’s status. Every year, your dormant company must submit accounts to Companies House to comply with the regulations. If this doesn’t happen your company can become active for Corporation Tax purposes too. 

 

There are some allowable expenses, such as incorporation fees, legal and professional fees and registered office services. The costs of submitting your annual accounts and a confirmation statement to Companies House each year are also allowable. 

 

You can manage these by paying through a personal account without affecting the dormant status of your company. If there are any other financial activities you’ll probably need to file complete statutory accounts. 

 

Significant transactions could mean your company’s dormant status is revoked. They are the type of transactions you must normally include in your accounting records, such as buying and selling property. This is especially important when a director of the company or someone connected with them buys or sells the assets. 

 

Significant accounting transactions mean your company is no longer dormant. If this happens, even accidentally, you must prepare and submit detailed company accounts and you’ll probably need accountancy support. 

 

To confirm your company hasn’t made any significant transactions during the financial year there’s a simplified online system. To use this, you need to sign up for the Companies House web filing service. Alternatively, you can download and complete a form (AA02) for a company limited by shares. 

 

If you don’t file the right information you can receive penalties. These include charges for late filing of accounts, which can double if it happens for two consecutive financial years. You could also risk your company being struck off the register and dissolved. 

 

To make your company active again you must: 

• tell HMRC within three months of restarting business activity to change your company’s status 

• file a Corporation Tax return 

• make your Corporation Tax payments. 

 

You’ll also need to: 

• re-register for Corporation Tax with HMRC 

• submit accounts to Companies House within nine months of your company’s financial year-end. 

 

Reactivation of a dormant company generally takes around three months from when you restarted trading or received income. 

 

Profectus Accounting provides bookkeeping and accounting services for small and large businesses. If you would like to know more about making your company dormant please get in touch.