Your company may be considered dormant if it is not currently carrying out any business and it does not have any other sources of income, including investment income.
There are a number of reasons why a company may be dormant. A company can be dormant from the moment it’s formed or an existing trading company might become dormant. However, ‘dormant’ can mean different things, dependent upon whose viewpoint you are looking from. For example, a company may have dormant status for corporation tax purposes, but it may not meet the stricter definition applied by Companies House.
Dormant company definition for corporation tax purposes
Your company will be considered dormant for corporation tax purposes in any of the following circumstances:
- It is not trading and does not receive any other income. This includes investment income.
- It is a new limited company that hasn’t started trading yet.
- It is a flat management company.
- It is an unincorporated association or charity that owes less than £100 corporation tax.
Need to file dormant company accounts?
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A company will not be considered dormant for corporation tax purposes if it is carrying on any business activity, including the buying and selling of goods or providing of services; earning interest; managing investments or otherwise receiving income.
If a company is considered to be dormant by HMRC then it will be exempt from the requirement to file an annual corporation tax return.
Dormant company definition for Companies House purposes
Companies House employ a more rigorous dormant company definition. They define a dormant company as one that has had no significant accounting transactions during the accounting period. A ‘significant’ accounting transaction is defined as one that the company should enter in its accounting records. Provided no such transactions occur during the financial period then the company can have dormant company status.
One benefit of having dormant company status is that it reduces the statutory burden on a company. A private company that qualifies both as ‘small’ and ‘dormant’ need only submit to Companies House an unaudited abbreviated balance sheet and certain prescribed notes. It is not required to file a profit and loss account or directors’ report – although the company may still be required to prepare these for presentation to shareholders. For further details refer to our guide entitled ‘Types of limited company accounts’.
In addition to annual accounts, all dormant companies must file an annual confirmation statement.
So, dormant company status can result in great time and cost savings. However, great care must be taken if this status is not to be lost, as almost all financial transactions must be reported in the company accounts. In fact, Companies House has defined only the following few, very specific transactions that the company may put through their records and still submit dormant accounts:
1 Payment for shares by the subscribers to the memorandum of association
When a company is incorporated the very first shareholders – often called the subscribers – will usually pay or agree to pay something for their shares. The company needs to account for this. So, if four initial subscribers each paid £1.00 for a £1.00 share then the company would have a paid up capital of £4.00. This would be represented by an asset, generally recorded as Cash in Hand of £4.00. The receipt of this £4.00 would not be a significant accounting transaction and dormant company status would not be jeopardised.
2 Fees paid to Companies House
Every company must file a confirmation statement (which replaced the annual return from 30 June 2016) at least once every 12 months. For this Companies House charge a fee – currently £13. The payment of this fee, by the company from its own resources, would again not be classified as a significant accounting transaction. In addition to the confirmation statement fee companies can also pay a fee on changing the company name and/or a re-registration fee: these too can be put through the company accounts without loss of dormant company status.
3 Payment of a civil penalty for late filing of accounts
If a company is late in filing its accounts, then HMRC will issue an automatic penalty. The company can pay this penalty and it will not classify as a significant accounting transaction.
While item 1 above is fairly obvious and unlikely to cause any issues, take care with items 2 and 3 to avoid triggering a significant accounting transaction. This may occur when the sums demanded require payment from an account: if there is a cost to making the payment, such as a fee for processing a cheque, then this cost, however small, will be considered a significant accounting transaction and would cause the company to lose dormant company status.
In addition to bank charges, earning interest on a bank account will cause a company to lose dormant status since this too will be considered a significant accounting transaction – even if the amount of interest is only a few pence. If a dormant company has a bank account, it is wise to take steps to make sure it neither incurs any charges nor earns any interest. Better still, to avoid “accidents” consider whether the dormant company should have a bank account at all.
A dormant company must be careful to avoid significant accounting transactions
The following common scenarios illustrate how careful a dormant company must be to avoid significant accounting transactions:
- If the company itself settles an invoice, perhaps one issued by an accountant for preparing the dormant accounts, this transaction must be put through the accounts and the company would cease to be dormant.
- The formation costs of the dormant company must not be paid be the company itself.
- Remember also that a dormant company cannot have paid employees as the payroll expense would have to be recorded in the company’s accounting records.
- Similarly, a dormant company cannot pay dividends to shareholders without losing dormant company status.
If dormant company status is lost because of a significant accounting transaction, the company will have to file normal accounts.
Given how easy it is to unwittingly incur a significant accounting transaction we strongly recommend the owners of dormant companies cover incidental expenses without using the company bank account. They can instead pay them personally or have another company pay them.
If dormant company status is lost because of a significant accounting transaction, the company will have to file normal accounts. These may be more detailed and take longer to prepare. A company is much more likely to require the services of a professional accountant in producing them.
Making it easy for dormant companies that have never traded
For the very simplest dormant companies, those that have not traded since incorporation and where the only transaction recorded is the issue of subscriber shares, Companies House has reduced the filing burden further still. They have produced Form AA02 (also known as Form DCA) – a highly simplified dormant company accounts template. To qualify for this simplified submission, fees, such as the Companies House confirmation statement filing fee, must have been paid by a third party without right to reimbursement from the company.
Making it simple to file dormant company accounts
If your dormant company has never traded, Inform Direct can help you complete your dormant company accounts in just three easy steps. It calculates the balance sheet values; provides the statutory balance sheet statements and checks for the most commonly made mistakes. You can file your accounts online and print a copy for your own records. Companies House normally approve dormant company accounts within 24-48 hours of receipt and Inform Direct will automatically email you to confirm this approval once received.
What’s the difference between a dormant company and a non-trading company?
A dormant company should not be confused with a non-trading company. A company that is non-trading (i.e. not carrying out any business) may nevertheless be involved in other day to day financial transactions. For example, costs such as rent, wages, bank charges or legal fees must be reflected in the company’s accounting records and if this is the case, then even if non-trading, the company will not be considered a dormant company. Remember that a company will only be considered dormant by Companies House if it has had no significant accounting transactions during the accounting period.
Recognising the distinct status of non-trading companies and dormant companies, Companies House provides a separate SIC code for each. The Standard Industrial Classification (SIC) code describes the main business activity of the company and must be included when forming a company (from 30 June 2016) and, where not previously advised to Companies House, detailed in the confirmation statement. For non-trading companies the appropriate code is 74990 and for dormant companies 99999.
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A previous version of this article was originally published on 26 June 2014.