A dormant company is a business that is not currently trading and does not have any other income coming into the business. This means that the company is not involved in trading activity, so will not need to submit annual returns to HMRC to declare its income or pay corporation tax. However, before you declare your company dormant, it is important that you understand exactly what this means and whether it applies to your company.
In this article, we will explain everything you need to know about making your company dormant, including when you should declare your company dormant and what it means for your business. We will also answer some of the most commonly asked questions on this topic, helping you to make the right decision for your company.
Types Of Dormant Company
There are two different types of dormant company that you need to be aware of: those that are dormant for corporation tax and those that are dormant for annual accounts. Your company may be dormant for one or both of these things, so it is important that you understand what qualifies a company to be dormant for each of these reasons.
Dormant For Corporation Tax
If a business has ceased trading and does not have any other income such as investments, it may be considered dormant for corporation tax. This could also be the case for a new limited company which has not yet started trading.
A company that is dormant will not need to complete an annual company tax return or pay corporation tax, as it is not generating any income. However, you may still need to file annual accounts and complete your annual confirmation statement.
If your company has stopped trading, you can notify HMRC and request that your company is made dormant for corporation tax. Alternatively, HMRC may write to you to notify you that they have decided to treat your company as dormant if they believe that your company is no longer trading.
Dorman For Annual Accounts
In the majority of cases, you will still need to file annual accounts and a confirmation statement each year, even if your company is dormant for corporation tax. This is because Companies House has a different threshold for dormancy. However, if Companies House treat your company as dormant and your company is classified as being ‘small’, you may be able to file dormant accounts instead.
Companies House treat a company as being dormant if it has had no significant transactions in the last financial year. Transactions exclude those paid to Companies House, any penalties for the late filing of accounts and any money that was paid for shares when the company was incorporated.
Should I Close My Limited Company Or Make It Dormant?
If your business has ceased trading, you might be wondering whether you should close your company or simply make it dormant. The answer to this question will depend on your long term plans for the business.
If you are simply taking a break from running your business, whether that break is likely to be months or even years, it is best to make your company dormant. This means that you can restart your company in the future without the costs associated with closing a business and starting a new one.
However, if you have made the decision to permanently stop trading, and you know that you will not be reopening the business, it is best to close your company.
If your business is solvent (able to pay any debts), you will be able to apply to Companies House for your company to be struck off the register. If your company is insolvent (unable to pay its debts), the company will need to be liquidated, either through voluntary liquidation or compulsory liquidation.
What Qualifies As A Dormant Company?
A dormant company is a company that has ceased trading and does not have any form of income. However, the company has not been closed completely, as there is a possibility that the company may reopen in the future.
Companies House classifies a company as dormant if it has not made any ‘significant transactions’ in the last financial year, whilst HMRC counts a company as dormant if it is not generating any income. It is important to check the criteria of both organisations before deciding whether your company can be classified as being dormant.
What Is The Purpose Of A Dormant Company?
There are a few different reasons why a company may be dormant. Let’s take a look at the some of the reasons for a dormant company.
A new business preparing to launch – Sometimes an entrepreneur may create a company and leave it dormant to reserve the company name whilst it prepares to launch. This could take months or even years, depending on the complexity of the business plans.
Restructuring a business – If a business is undergoing a restructure, the company may be made dormant whilst trading is suspended. The company will then become active again when it restarts trading.
Protecting a trading name – You may find that companies are created and made dormant in order to protect a trading name from being used by other businesses.
Taking a break – Sometimes business owners decide to take a break from trading. This could be a result of illness, maternity leave or simply taking time out to pursue other ventures. Whether it is for months or years, if a company suspends trading it may be made dormant until the business owner decides to resume trading.
What Happens When A Company Goes Dormant?
A company becomes dormant when it ceases trading and does not have any income. Whilst the criteria for being a dormant company is slightly different for Companies House and HMRC, essentially if a company is no longer trading and does not have any form of income, it may be counted as being dormant.
Once a company has been registered as dormant with HMRC, it will no longer need to file an annual company tax return, or pay corporation tax. However, the company may still be required to file annual accounts and a confirmation statement, depending on the size of your company.
The company can be taken out of dormancy and restarted at any time by the company director if they decide to resume trading.
How Long Can A Company Stay Dormant?
You might be surprised to learn that there is no time limit on how long a company can stay dormant. This means that a company can remain dormant indefinitely, without risking being struck off by Companies House.
However, you will need to ensure that you continue to file your annual accounts and confirmation statement with Companies House so that your company can remain in an ongoing state of dormancy.
Can A Dormant Company Pay Salary?
A dormant company is a company that is no longer making transactions. This includes all trading activities, meaning that it covers both incoming and outgoing transactions.
Whilst a company is dormant, it cannot buy or sell goods or make investments. This also means that a dormant company cannot pay a salary to a director or any other type of employee.
Do I Need To Tell HMRC If My Company Is Dormant?
If your company has ceased trading and you intend for it to remain dormant, you might be wondering whether you need to inform HMRC. In the majority of cases, HMRC will identify a dormant company from its most recent tax return, when it identifies that there are no trading activities taking place. If this happens, HMRC will contact you to let you know that it will be treating your company as dormant going forwards.
However, if you are incorporating a new company that you intend to keep dormant, you will need to inform HMRC of its dormancy. This is because HMRC will not see that the company is dormant until the first tax return is submitted.
Once HMRC is aware that your company is dormant, you will no longer be required to submit tax returns in most cases.
Do I Need To Tell Companies House My Company Is Dormant?
If your company has ceased trading and is classified as being ‘small’ by Companies House, you will need to inform Companies House that your company is now dormant. However, you don’t need to do this until it is time to submit your annual accounts.
It is important to note that you will still need to submit annual accounts to Companies House when your company is dormant. Luckily, these are simplified dormant company accounts rather than full accounts, so they are relatively straightforward to complete and can help to keep your administration to a minimum whilst your company is dormant.
Does A Dormant Company Need A Bank Account?
When a company is dormant, this means that no business transactions are taking place. So, there should be no incoming or outgoing financial transactions from or to the business. For this reason, a bank account is not required for a dormant company.
In fact, if you hold a business bank account and money leftover from the company earns interest, your company may no longer be seen as dormant due to the income generated by the interest, even if it is only a few pounds. So, it may be wise to close down your company’s bank account when it becomes dormant.
Can You Pay Dividends From A Dormant Company?
You might be wondering whether it is possible to pay dividends from a dormant company. However, it is not possible to pay dividends from a dormant company. This is because a dormant company, by nature, cannot make financial transactions, either in or out of the business. If a dormant company was to pay a dividend, it would no longer be classed as a dormant company by HMRC or Companies House.
How To Restart A Dormant Company
If you’re thinking about restarting your dormant company, you might be wondering how to go about doing so. In this section, we will explain the process of restarting a dormant company, helping you to avoid making any mistakes that could lead to a financial penalty.
When you decide to restart a dormant company, you will need to inform HMRC that your company has resumed trading. You will do this by registering for corporation tax through your online business tax account.
Within 9 months of your company’s financial year end date, you will need to send your business accounts to Companies House, as well as paying any corporation tax that is due. You will also need to resume submitting annual company tax returns to HMRC to declare your profits or losses.
If you have decided to cease trading but want to keep your options open for the future, you might decide to make your company dormant. This means that you won’t need to complete an annual company tax return or pay corporation tax, and you will be able to submit simplified dormant company accounts to Companies House, reducing your admin requirements. However, the door will be left open should you decide to resume trading in the future.
Companies are often made dormant during periods of illness, maternity leave or when the business owner needs time to consider their next steps with the business. During this dormancy period, your trading name is kept safe from your competitors, without a lot of the paperwork that typically comes with having an incorporated company.