What Is a Dormant Company?
When starting or managing a business in the UK, you may come across the term “dormant company.” But what exactly does it mean, and why might a company choose to be classified as dormant? In this article, we’ll explore what a dormant company is, why it matters, and the specific requirements involved in maintaining this status.
What Is a Dormant Company?
A dormant company is registered with Companies House but isn’t actively trading or conducting business operations. In other words, the company is not generating income, engaging in transactions, or operating in a way that affects its financial position. However, a dormant company still exists as a legal entity and is recognised by Companies House.
In legal terms, a company is considered dormant if it has had no significant accounting transactions during a specific accounting period. This means there are no entries in its accounting records except for certain permitted transactions, such as:
- Filing fees to Companies House
- Penalties for late filing
- Payments for shares when the company was first set up
Why Would a Company Be Dormant?
There are several reasons why businesses might choose to register as dormant, including:
- Securing a Business Name: Some entrepreneurs register a company and then leave it dormant to reserve the company name for future use. This prevents competitors from taking the name while they develop their business plans.
- Preparing for Future Operations: Some companies are set up well in advance of trading to allow time for setting up bank accounts, seeking investment, or obtaining necessary permits and licenses. Keeping the company dormant during this preparation phase can help avoid unnecessary tax liabilities.
- Holding Intellectual Property or Assets: A dormant company may also be used to hold intellectual property rights, such as trademarks or patents, or to own real estate and other assets without engaging in trading activities.
- Temporary Business Inactivity: Sometimes, companies become dormant if the business pauses operations temporarily, perhaps due to a change in management or strategy. This can be a way to reduce costs while preserving the company structure for future use.
Dormant Company vs. Active Company: What’s the Difference?
The primary distinction between a dormant and an active company lies in whether significant financial transactions are taking place. Here’s a quick comparison:
| Criteria | Dormant Company | Active Company |
|---|---|---|
| Trading or Generating Income | No | Yes |
| Financial Transactions | Only permitted transactions | Regular trading and transactions |
| Filing Requirements | Simplified | Full financial statements required |
| Corporation Tax | Not required if truly dormant | Corporation tax filing mandatory |
Filing Requirements for Dormant Companies
While dormant companies are not actively trading, they still have some obligations to remain compliant with UK law. These requirements include:
1. Annual Confirmation Statement (Form CS01)
Even if a company is dormant, it must still submit an annual confirmation statement to Companies House. This form confirms the company’s registered details, such as directors, shareholders, and the registered office address. The confirmation statement is due once a year and typically costs £13 if filed online.
2. Dormant Company Accounts (Form AA02)
Dormant companies must file dormant accounts annually. These are simplified financial statements that confirm the company has had no significant accounting transactions during the financial year. The filing process is more straightforward than that of an active company, and filing dormant accounts is usually free if submitted online.
3. Corporation Tax Returns
While dormant companies are generally exempt from paying corporation tax, they still need to notify HMRC of their status. You must inform HMRC that your company is dormant to avoid receiving tax notices. Once accepted as dormant, you won’t need to submit tax returns unless your status changes.
How to Make a Company Dormant
If your company is currently trading and you want to make it dormant, you can follow these steps:
- Cease All Trading Activities: Stop generating income and halt any transactions that would affect your company’s financial position.
- Notify HMRC: Inform HM Revenue & Customs (HMRC) that your company is no longer trading. This can be done by writing to your local tax office.
- Submit Final Accounts and Returns: File any outstanding corporation tax returns and pay any due taxes before switching to dormant status.
- Submit Dormant Company Accounts: Once your company is dormant, you’ll need to submit simplified accounts annually to Companies House.
Can a Dormant Company Start Trading Again?
Yes, a dormant company can become active again at any time. If you decide to restart trading, you’ll need to:
- Inform HMRC that your company is now active and trading.
- Prepare and submit full statutory accounts.
- Restart filing corporation tax returns.
Once you start generating income or conducting business transactions, your company will no longer be considered dormant, and the usual filing obligations will apply.
What Happens if a Dormant Company Fails to Comply?
Failing to meet the legal requirements of a dormant company can lead to penalties and even strike-off proceedings by Companies House. Common issues include:
- Late filing of dormant accounts
- Not submitting the annual confirmation statement
- Failing to notify HMRC of your company’s dormant status
To avoid penalties, ensure that all submissions are made on time, even if your company isn’t actively trading.
Conclusion
A dormant company can be a strategic tool for small businesses in the UK. Whether you’re planning for a future venture, holding intellectual property, or simply securing a company name, understanding the implications and obligations of maintaining dormant status is crucial.
If you’re thinking of keeping your company dormant, remember that while the administrative burden is lighter than for active companies, there are still essential filings to keep your business compliant. By staying on top of these requirements, you can keep your dormant company in good standing until you’re ready to bring it to life.
Need Help Managing Your Dormant Company?
If you need assistance with registering a dormant company, maintaining, or reactivating a dormant company, professional services like The Company Warehouse can guide you through every step of the process, ensuring you remain compliant with UK regulations. Contact us today to learn how we can support your business journey!