What is a Dormant Company?

This may seem like a straight forward question but is slightly more complicated than it appears to be.

There are in fact two definitions of a dormant company: one for the purposes of HMRC and the other for the purposes of Companies House each for different purposes and each with different criteria.

Corporation Tax

There are a number of circumstances under which HMRC have confirmed that they will regard a company as dormant.

·        A new company for the period before it has commenced business activities or trading or has any other income from investments etc.

·        A company will not be considered active (see below) if it has only carried out pre-trading activities such as preparing a business plan or negotiating contracts or only incurred pre trading expenditure.

·        Dormant companies might also include companies that have previously traded but have now stopped trading and no longer carry on any business activity or have other income subject to corporation tax.

·        A flat management company is generally considered dormant, subject to certain conditions, as are unincorporated associations or clubs owing less than £100 Corporation Tax.

For these purposes HMRC regard a company as “active” for corporation tax purposes if it is:

• carrying on a business activity such as a trade or professional activity
• buying and selling goods with a view to making a profit or surplus
• providing services
• earning interest
• managing investments
• receiving any other income

An active company cannot therefore be regarded as dormant for corporation tax purposes.

Dormant companies can be used for a variety of purposes including:

·        To protect a trading name.

·        To hold an asset that is not expected to generate any income.

The question whether a company is dormant is an important one because a dormant company is not normally required to file accounts or a corporation tax return to HMRC. HMRC will normally write to confirm a company is dormant and that it is not required to submit accounts or a corporation tax return.

If a company is VAT registered or has a PAYE scheme it will normally be required to deregister for VAT and close its PAYE scheme.

Companies House

For Companies House purposes a company is considered to be dormant if it has no “significant accounting transactions” during an accounting period.

A “significant accounting transaction” is defined as a transaction which a company would normally enter into its accounting records although according to Companies House guidance the following transactions are not regarded as significant for these purposes:

·        Payment for shares taken by subscribers.

·        Fees paid to the Registrar of Companies in connection with a change of company name, registration of a company or filing fees for the submission of confirmation statements.

·        Payment of a civil penalty for late submission of company accounts.

It should be noted that any limited company must submit accounts to Companies House every year. However, a dormant company can submit dormant accounts which are simpler than trading accounts but are still required to contain:

·        A balance sheet containing statements above the director’s signature confirming that the company was dormant throughout the accounting period.

·        Comparative figures for the previous year even if the company was dormant throughout.

·        Certain notes to the balance sheet.

In addition, a dormant company can, under certain conditions, obtain an audit exemption.

It will be noted that the Companies House requirements for a dormant company are much stricter than those for HMRC in particular in relation to the “significant accounting transactions” restriction. For these reasons it may be sensible to close any relevant company bank accounts if it is intended that a company will be dormant for Companies House purposes. In addition, it will be seen that the permitted transaction for a dormant company are very narrowly restricted.

Please note that the following articles are intended for the purposes of general information only. In certain cases some subjects have been simplified through the exclusion of more detailed and complex areas of legislation not appropriate to a general article.

It is therefore important to ensure that appropriate professional advice is taken on any relevant matters. These articles are not intended to be a substitute for genuine professional advice and we cannot therefore accept any liability arising from the use or misuse of information contained in them.