How to make a company dormant?
By Trinity Hanson, Last updated: 2022-04-07 (originally published on 2021-09-20)
Dormant, or inactive companies are often mistaken for being closed or obsolete companies, however, this is not the case. A company may choose to enter into a period of dormancy for a number of reasons, for example, to reserve a company name before the business begins formally trading, restructuring a previously active business, or protecting IP and trading rights from other businesses who may use it. Regardless of its reason, it is important that every company understands exactly what a dormancy period entails and what formalities need to be met in order to maintain it.
What is a Dormant Company?
A dormant company is any company or association that is not engaging in business or trading and does not have any alternative forms of income. Therefore, a company is considered dormant, also known as ‘inactive’, if it is not trading or receiving any form of income from trading. It is important to note that a company can only be considered dormant if it has been formally registered with Companies House and their halt on trading has been notified to HMRC.
When can I make my Company Dormant?
Under HMRC’s guidelines for registering an inactive company, a dormant company must meet one of the following criteria:
- A new company that’s not yet trading
- An ‘off-the-shelf’ or ‘shell’ company held by a company formation agent intending to sell it on
- A company that will never be trading because it has been formed to own an asset such as land or intellectual property
- An existing company that has been, but is not currently, trading
- A company that’s no longer trading and destined to be removed from the Companies Register
Alternatively, even if you intend to maintain your company’s dormant status, it will be considered an active company for corporation tax purposes if it fulfills any of the following roles:
- 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
How to make a Private Company Dormant
In order to declare your company dormant, it is essential to contact HMRC and inform them of your change in company status; there are a number of ways to do this. Companies that have never received a ‘notice to file a Company Tax Return’ from HMRC can simply contact them over the phone to indicate their company’s change of trading status. Alternatively, if your company has previously received this notice, or has previously filed a return, you will need to file a Company Tax Return online using your HMRC online account, which will notify the HMRC that your company has ceased trading and is now dormant.
How Do I Tell HMRC My Company Is Now Dormant?
While there is technically no requirement to notify the Companies House of your company’s inactive statement until your next annual accounts are due, you should inform HMRC as early as possible by contacting the office of local Corporation Tax. They will send a reply in approximately 15 days to confirm the company’s dormant status. After you have been contacted by HMRC confirming the dormant status of your company, there is no further need to contact the HMRC again until the company is active.
If your company was trading previously before it decided to become dormant, you will need to complete HMRC’s Company Tax Return and pay the relevant Corporation Tax for the active period. After that, the company will be considered inactive until it starts trading again. All the relevant submissions, filings, and contact information are available on HMRC’s official website.
Does it Cost to Make a Company Dormant?
Once your company is registered as dormant with HMRC, you will still need to pay costs to maintain its status. These arrangements include an obligation to file an annual confirmation statement each year in order to prevent other people from registering your company name and also give a brief overview of current information concerning the company and who’s involved with it. Companies House provides a streamlined form accessible through the HMRC website for dormant companies that have never traded where the online filing fee is £13. The due date for submitting the company’s confirmation statement is the anniversary of the date of incorporation and then usually a year after the last one was filed.
You are also required to submit dormant company accounts which can be done on HMRC’s website as well, free of charge. While the actual process of filing for dormant company accounts is free of charge, costs will arise if you fail to file on time and penalty fees are incurred. Acts of non-compliance like this can lead to a fine and in the event of a serious breach, can lead to the company being struck off the register.
How Do I Get Money Out of My Dormant Company?
Money can be taken out of a dormant company, for instance, for the purposes of paying out dividends to investors. However, a dormant company cannot pay dividends to shareholders without losing its dormant company status. You may consider alternative tax-efficient methods of extracting any remaining money from your dormant company by making pension contributions on behalf of the company’s directors, repaying outstanding loan balances to company members, or paying shareholders a final dividend amount.
How Do I Restart My Dormant Company?
Similar to changing your company’s status from active to dormant, your company’s directors will need to inform HMRC if it is to start trading again. This must be done within three months of the date from which the company starts to trade again or receive an income. Put simply, you will need to complete three basic steps in order to activate your dormant company.
First, your company’s directors must inform HMRC that the company has resumed trading by registering for Corporation Tax. Additionally, any withstanding corporation tax bills due must be paid within nine months and one day of the company’s accounting reference date. This can easily be done by consulting HMRC’s online streamlined form. Next, company accounts will need to be sent to the Companies House within nine months of the company’s accounting reference date. Finally, a company tax return should be submitted to HMRC within twelve months of the company’s accounting reference date.
Outside of informing HMRC, there is no formal requirement to specifically notify the Companies House if a dormant company resumes trading as your next set of annual statutory accounts will show that the formerly dormant company has been reactivated.
Can I Register a Company and Leave it Dormant?
Yes, if your company is not ready to start trading, you can register your company and leave it in its ‘dormant state until you decide to activate it. However, note that in order to maintain its dormant state and prevent unwanted penalty fees, you must continue to submit dormant company accounts as well as a confirmation statement. Once you feel your company is ready to commence trading, simply notify HMRC and follow the basic steps above, allowing them to record your start date and begin generating your tax documents accordingly.
How Long Can I Keep My Company Dormant?
There is no deadline or time limit for keeping your company in its dormant status. As long as you continue to keep your Annual Returns and Annual Accounts up to date with Companies House each year, you can leave your company in an ongoing dormant state until you are ready to commence trading.
Do Dormant Companies Need to File Annual Returns?
No, if your company has informed HMRC that you will no longer be trading, you will not need to pay Corporation Tax or file another Company Tax Return.
Do dormant companies need to be audited?
Yes, a dormant company is not entitled to audit exemption unless its balance sheet contains a statement or statements under CA 2006, s. 475(2). Similarly, an audit of the financial statements is, therefore, necessary if there is a specific requirement in the company’s articles of association to appoint auditors.
Does a dormant company need a bank account?
As dormant companies must not engage in accounting or financial transactions during their dormancy period, they will not require a bank account. Because no money is being spent or generated by the business, no transactions will be taking place that requires entry into the company accounts.
Regardless of which stage your business is in, it is crucial you understand how a period of dormancy can affect a company and how it may be advantageous for your own startup. If you are preparing to make your company dormant, consult Zegal’s plethora of resources or get in touch with our team of industry experts.
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