What is a Dormant Company? (A Complete Guide to Dormant Company)

Ryan Patrick

• 7 min read
What is a Dormant Company? (A Complete Guide to Dormant Company)

Are you wondering what a dormant company is? It can be defined as a company existing on paper but not active in the marketplace. This means the business is not trading or carrying out any commercial activity. Company dormancy is a resting state with rules and benefits like simple tax reporting nuances.

This blog provides crucial insight into understanding the concept of company dormancy, legal considerations, and how to maintain it. So continue reading as our experts break down everything you need about a dormant company in the UK.

What's a Dormant Company in the UK

The company dormancy status hinges on two criteria.

Under corporation tax criteria: This company doesn't engage in transactions such as generating trading activity. A new limited company without starting trading is also under the dormant company class. A company is termed as inactive for Corporation Tax by HMRC because they are not:

  • Company not trading
  • A newly formed company that hasn't started trading

Companies House criteria: This company has not performed any trading or hasn't had significant accounting transactions during a financial year. Examples of substantial transactions include:

  • Selling or buying any goods or services
  • Purchasing or renting property
  • Paying directors salaries
  • Operating payroll
  • Issuing shareholder dividends
  • Earning interest
  • Managing investments
  • Receiving dividend payments
  • Paying bank fees
  • Paying business formation costs or accountancy charges via the company bank account

What Keeps your Company Dormant

Dormant companies in the UK are prohibited from participating in financial activities to prevent them from becoming active and are subject to corporation tax. If an inactive company carries one of the above activities, it forfeits its dormancy status and transits to active for Corporation Tax. Here are allowable expenses for a dormant company:

Companies House late filing penalties

  • The payment is made by the first shareholders who join the company when it starts.
  • Charges paid to Companies House for submitting yearly confirmation statements (formerly known as 'annual returns'), altering the company name, or re-registering the company.
  • Costs associated with business operations, like contractual work, are not under allowable expenses for a dormant company. Such expenses do not affect its inactive status.

Why do Companies Become Dormant?

There are several reasons why you should change your company to dormant, including:

  • Protecting business trademark or brand name
  • When restructuring your existing company
  • Preventing business name from being used by other companies
  • Reserving the business name for later use
  • Holding intellectual property or assets
  • Temporary measure after death or illness of company owner

Remember that establishing a limited company is the best way to protect a company name. Failing to do so may result in another business registering your desired name. If you register a business solely to protect a name, ensure you don't conduct business operations through the company. It can remain inactive indefinitely exclusively to preserve a brand name or trademark.

A company can remain inactive for a long time, but you must know there are expenses you incur maintaining the company on the official register. Additionally, your company must fulfil specific requirements for HMRC and Companies House.

How to make a Company Inactive

If you want your business's trading status to be dormant or make your new company inactive, you must write to the HMRC Corporation tax office. You must inform them of the date the company became dormant. You will find the HRMC contact details in the letters you received from them. On the other hand, you can find the Corporation tax office information online.

It takes approximately 15 days to receive a letter from your registered office confirming the acceptance of the dormant status from HMRC. If your business trades, the HMRC will send you a letter asking you to deliver the company's tax return. You must complete this before the business becomes dormant within the tax accounting period. You should provide it online to HMRC. Furthermore, you must pay tax on any profits you make during that period.

Additionally, you should cancel the VAT registration and close down the payroll. Ensure you pay all outstanding bills, such as employee and director salaries, direct debit, shareholders dividends, etc. If other companies owe your company money, ensure all counts are settled.

Must I Notify Companies House?

You don't need to notify Companies House when your company is dormant; however, you must file the confirmation statement and inactive accounts annually. When you submit the annual accounts, that's where the company's House will know about your business's dormant status. You can submit this information by filling out the form AA02 or via post. You are required to submit the AA02 form correctly; failure may lead to penalties.

The purpose of filing the confirmation statements is to provide vital snapshots of the company's data at the confirmation date. The Companies House uses the information to ensure the registration details on the public record are up to date and accurate.

The details on the confirmation statement are:

  • Name and company registered number
  • Registered office address
  • Statutory records location
  • The SAIL address (Single Alternative Inspection Location)
  • Secretary's details
  • Director's details
  • Shareholders or guarantor's details
  • Standard Industrial Classification Code
  • Share capital information
  • Information on the people with significant control registers

The deadline for filing the confirmation statement is nine months from the company's end of financial year or accounting reference date. But if you're filing your business's first accounts, you may file 21 months from the date of business formation.

Remember to submit the information at least yearly, even if it remains unchanged. If your company details change, inform the Companies House immediately and include the changes on the confirmation statement. Inactive companies must also update the statutory records and keep them available for public inspection at the SAIL address.

Advantages of Using the AA02 FORM

Digital technology has made it easier to file dormant company accounts online. Online services simplify the process of submitting these accounts for companies that aren't active by providing:

User-friendly online template

You can use validation checks to minimize errors

Fast approvals within 24 hours

  • Submitting documents via email instead of in-person visits
  • Cost saving since filing is free, unlike using courier or posting services
  • Tailored service, which is easier
  • Will a dormant account need auditing

Inactive Companies still require auditing except when their balance sheets have a statement under CA 2006 s. 475 (2). A company's financial statement can be audited if articles require it of association.

Does a Dormant Company Need a Bank Account?

Inactive companies can't receive or spend money; otherwise, the company will come to be active for Corporation Tax. So, you should close all the company's accounts to avoid potential risk. Note that even minor transactions, such as earning interest or paying bank fees, may forfeit your trading status. If your business starts operating, you may open another bank account.

Need help opening a bank account for your business in the UK? Contact Incorpuk today, if need help achieving this goal.

Do you need help forming your company in the UK?

At Incorpuk, we will help you through the company formation process, and file your confirmation statements to help your business stay compliant. Whether you're a UK resident or a non-UK resident, our team is ready to provide guidance and help you establish your company in the UK. Contact us here today.

How to Change a Dormant Account to Active

Transitioning a dormant company to an active status significantly impacts its accounting and tax responsibilities. It's crucial to update the company's accounting system during this process to document important accounting transactions correctly. Furthermore, an active company must meet Corporation Tax payments and file a Company Tax Return, unlike a dormant company, exempt from these duties unless explicitly asked for by HMRC.

If you want to make your business active again, contact the HMRC within three months after restarting your business or receiving any income. If your company hasn't traded before, register it for corporation tax. To create this Government Gateway account, you must provide:

  • Company name
  • Company number
  • The date the business became active note this will be the start of the business accounting period
  • Address where the company's activities are done
  • Standard Industrial Classification code
  • Accounting reference date (ARD)

The HMRC will add this information to their records and work out your business accounting period for filing corporation tax. This will begin when the company starts trading until the ARD date of your business's annual accounts.

You will receive a letter from your official office outlining your company's deadlines for paying Corporation Tax and submitting Company Tax Returns. To fulfil these requirements, keeping precise business and accounting records is crucial, enabling you to accurately complete these tax returns and determine your company's tax obligations.

If your business employs staff, register as an employer, set up PAYE, and register for VAT if you expect a turnover exceeding £85,000. You don't need to notify the Companies House immediately after you start trading; you will inform them when filing the following annual accounts.

Dormant Company Variations

There are dormant company variations like a non-trading company, a new company, and dormant subsidiaries.

Dormant company: is a business registered as a limited company and doesn't engage in any financial transactions

Dormant subsidiaries are companies eligible for exemptions from the obligation to prepare and submit financial statements according to section 394A of the Companies Act 2006. Additionally, every new company must submit a confirmation statement and annual accounts annually to Companies House.

Dormant vs. Non-trading Companies

There is a difference between a dormant company and a non-trading company. You must understand the difference for effective business management.

An inactive company is a registered company that doesn't engage in business transactions and activities, while a non-trading company has minimum business activities. A non-trading business is a company that has started trading but ceases it. A non-trading company may engage in business transactions, whereas a dormant must maintain the inactive status.

Conversely, subsidiaries and new companies can also feature in dormant companies. A new company can be inactive if it hasn't traded or generated income. Dormant subsidiaries can be exempt from preparing or filing financial statements without significant accounting transactions. A dormant subsidiary will not incur any tax liabilities if it remains inactive throughout the financial year. This circumstance may present chances for tax savings and could potentially result in capital losses if the subsidiary is eventually liquidated.

Winding Up

Understanding a dormant company in the UK is crucial for business management. These companies don't engage in any commercial activities, and engaging in even the most minor financial transaction may forfeit the business's dormant status. Inactive business status provides tax-saving opportunities and helps maintain and protect a company name. You must adhere to specific rules, such as updating the HMRC and Companies House to keep the dormant status. Transitioning from inactive to active involves tax and accounting obligations. It's essential to distinguish between dormant, non-trading, and subsidiary companies to manage them effectively and avoid potential penalties.

Do you need help forming your company in the UK? At Incorpuk, we will help you through the company formation process, and file your confirmation statements to help your business stay compliant. Whether you're a UK resident or a non-UK resident, our team is ready to provide guidance and help you establish your company in the UK. Contact us here today.