What is a Dormant Company?: A Complete Guide

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Many times, people confuse a dormant business with one that is “closed” or “obsolete.” However, it’s a completely different scenario. An HMRC dormant company is something that is not generating revenue and, therefore, cannot be considered for corporate taxes.

Now, how does HMRC determine what company is dormant and how long does a company has to be in this state to be declared “dormant”? Fortunately, we chose this topic to answer all of your doubts today about a dormant company meaning. So, let’s get started!

Let’s Start with Dormant Company Meaning

A company is regarded as “dormant” if it is NOT doing any business or earning any income from business. However, it MUST be officially registered with Companies House and can be dormant from the date of its formation, or even after the start of active business.

As a result, a company that has stopped doing business, and informed HMRC about it, will be considered dormant (or inactive) for the purpose of corporation tax.

To consider what falls in the category of dormant activities, we need to understand what are trading activities. So, here’s a list of everything that are considered as “trading” and is taxable by the HMRC.

Purchasing and selling goods and/or services
Property leasing or buying
Employing people outside the initial group of directors
Paying directors’ salaries
Issuing shareholder dividends
Receiving dividend payments
Management of investments
Earning interest on/or paying bank charges
Using the business bank account to pay accounting or legal fees

So, if you are doing any of these activities inside your company, it cannot be declared “dormant.” Because, at this point, the HMRC does not care if you are generating any revenue or paying out the team from your pocket. Any transaction happening inside the business will be taken care of as taxable.

A dormant company can, however, conduct certain transactions and activities, such as:

Payment of shares by the initial shareholders who joined the business at the time of incorporation
Amounts paid to Companies House as fees and charges for submitting an annual confirmation statement
Settlement of any penalties for late filing with Companies House

What Are the Reasons Behind Making a Company Dormant?

Here, we are with a good question now! While a company may be registered and technically active, its operational activities are temporarily suspended. A business may enter a dormant state on the day of incorporation or may do so following a period of trading activity.

A company may be dormant for a variety of reasons, including the following:

keeping a company name reserved while getting ready to start the business
keeping a trade name safe to stop another company from registering it
restructuring a formerly active business
when an owner has to take a long leave of absence for any reason, including illness, maternity leave, travel, a sabbatical, or another circumstance

Your company can become dormant at any time, but you will still have to meet several legal obligations to Companies House and inform HMRC as soon as possible. This involves filing yearly confirmation statements and dormant company accounts, reporting changes to your company’s information, and maintaining statutory records that are current and accessible for public inspection.

Furthermore, if any of the following applies to your business, it will be dormant for Corporation Tax purposes:

a new limited company, yet to begin trading
an unincorporated association/club that owes less than £100 in corporation tax
a flat management company

Your business must not be carrying on a trade, and it must be wholly owned by its members. If your unincorporated business is operating but complies with the following two requirements, HMRC may consider it dormant for Corporation Tax purposes:

The annual Corporation Tax liability of your organisation does not/is not expected to be over £100
Your club/organisation runs exclusively for the benefits of its members

Things to Avoid While Setting Up Dormant Company

Setting up and maintaining a dormant company can be a strategic move, but it’s crucial to avoid certain activities that could inadvertently wake the tax beast. To ensure your dormant limited company remains exempt from Corporation Tax, steer clear of these three key pitfalls:

Trading Losses:

While a dormant company isn’t actively trading, it’s important to remember that any allowable trading losses incurred before dormancy cannot be carried forward. So, you have to make sure there is no trading activity during your pre-dormancy period to optimise future tax benefits, as these losses are effectively lost during the dormant time.

Assets on the Auction Block:

Disposing of assets during dormancy can trigger a chargeable capital gain, effectively jolting your company awake for tax purposes. Hold onto those valuable possessions until your business reawakens, or consider restructuring ownership to avoid the tax sting.

The Sweet Slumber of Tax-Deductible Interest:

While certain interest payments and annual payments may be tax-deductible for active businesses, claiming them during dormancy can be a rude awakening. These deductions can inadvertently push your company above the £100 Corporation Tax threshold, shattering the peaceful slumber of dormancy.

HMRC, however, will not regard your business as dormant if any of the following situations hold true:

Your organisation is a privately held club that is operated as a for-profit business by its members
According to the Housing Act of 1986, your company is a housing association, or you are a registered social landlord
Your organisation is a trade association
Your organisation is a thrift fund
Your organisation is a holiday club
Your organisation is a friendly society
Your company is either fully owned by or a subsidiary of a charitable organisation

In the case of a dormant company, HMRC will send you a letter notifying you of your Corporate Tax exemption and/or the fact that you are not required to file any Company Tax Returns.

What Information Is Required by Companies House?

An HMRC dormant company must submit a confirmation statement and dormant accounts to Companies House annually. The accounts comprise a balance sheet along with any relevant notes. These can be mailed (using form AA02) or submitted online to Companies House.

The annual confirmation statement, formerly called the “annual return,” is a record that lists and verifies significant company information. It also includes information that is required for dormant companies. The statement includes the following:

Your company’s name
The registered office address
SAIL address (if applicable)
Details of company directors
Details of company secretary (if appointed)
Details of shareholders
The location of statutory company records
Information regarding issued shares
Information about people with significant control (PSCs)
Nature of business activities (Standard Industrial Classification “SIC” code)

One thing to keep in mind is that a dormant company’s SIC code is 99999. Your SIC code needs to be updated on the following confirmation statement if your business stops trading or goes into dormancy after a period of activity.

End Notes – BusinAssist to the Rescue!

You may choose to maintain an HMRC dormant company to save on corporate taxes while you want to hold on to that company name. It is quite a strategic thing to do. However, there are many restrictions and too much paperwork to maintain this position. Don’t worry, BusinAssist is here to help you.

BusinAssist is a top provider of Global Business Support Solutions. We offer support services to start up, small to medium sized business and also to big multinational groups and companies.

We offer a wide range of support services to our clients which include International Company Formation and Company Secretarial Services. Setting up a company can be complex, as can be keeping up with statutory filing obligations.

Visit our website and contact us to find out more about our services today!

FAQs

Q: What is the difference between dormant and inactive companies?
Ans: A firm that does not do anything and does not have any other money sources, such as money from investments, may be called inactive. A business may stop working for various reasons. A business may become dormant right after it is started or it may go inactive after being around for a while. Dormancy is essentially the transition stage between incorporation or active to becoming inactive.

Q: What is a 99999 dormant company?
Ans: A dormant business is designated by the SIC code 99999. This informs the Companies House that you intend to leave this company dormant for the financial year.

Q: Who is eligible for dormant company?
Ans: In order for a company to be declared eligible for dormant status in the first place, it must not have been the subject of any order, investigation, or inspection. The Company cannot be the recipient of any outstanding secured or unsecured loans. The Company must not have made a mistake in paying workers’ wages.

Q: What is the maximum limit for a dormant company?
Ans: A company can remain dormant for a maximum of 5 years at a stretch. After 5 years, a registrar may strike off that company’s name from the incorporation list and officially remove its business licence.

Q: Can a director resign from a dormant company?
Ans: A director of a company may be chosen both during and after the company’s formation. Similarly, at any time following incorporation, directors may step down or be removed.

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