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. In essence, a dormant company is 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 then the company can have dormant company status.
A benefit of having dormant company status is that it reduces the statutory burden on a company. A private company that qualifies need only submit to Companies House an abbreviated balance sheet and 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. Dormant companies are also exempt from the requirement to file a corporation tax return.
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Dormant company status can be a great cost saving to the owners of a company but great care must be taken as just about any 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 of 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
A few more examples should demonstrate quite 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 by definition 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 will 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.
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 dormant. Remember that a company can only be dormant 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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