Dormant Companies: What You Need to Know
If you have a limited company, but it is not trading then it may be classed as dormant. A dormant company is a company that is not active.
What does Active Mean for a Company?
HMRC define a company as active when it is engaging in activities that generate an income. This includes carrying on business activity, managing investments or even earning interest. This is not the same as other definitions for trading with respect to VAT or Companies House. The definitions may also not match those set by various accounting conventions used to prepare audited accounts.
When is a Company Not Active?
The main period in which a company is not counted as active for corporation tax purposes will be after it has been incorporated but before it starts trading.
As long as the company has not started selling goods or services or been involved in an activity that would generate income it will not count as trading and therefore not be active. The company can still engage in activities and incur expenses as it prepares to trade without having to become active. These activities include those along the lines of writing a business plan or negotiating contracts.
A company can also inform HMRC that it has ceased trading and then become dormant.
You may even get companies formed for a sake of protecting a name or holding onto an asset. These would be classed as not active or dormant if no income is generated.
Corporation Tax and Dormant Companies
HMRC views a dormant company as a company that is not required to complete a corporation tax return. If the company was previously completing corporation tax returns then they will need to inform HMRC in writing that the company is dormant and request they close the company’s corporation tax record.
Obligations for Dormant Companies
Dormant companies still have obligations to fulfil for Companies House, even if HMRC do not require a tax return. The company annual return (a document containing company details such as the registered office and share capital) still needs to be completed each year. A simplified set of company accounts known as dormant company accounts also need to be completed. These accounts show the balance sheet of the company, which for dormant companies usually consist of shares and the amount paid/unpaid on each share.
Failure to keep these documents up to date could result in fines or the company being dissolved by Companies House (meaning the company would no longer exist).
What Happens When Dormant Companies Become Active?
If a dormant company becomes active, HMRC must be notified within three months. This is most often done through the government gateway, however, it is also done by post using the form CT41G which HMRC will have sent soon after the company was incorporated.
If you have any questions regarding the above or for limited companies and corporation tax in general, please do not hesitate to contact us.
Adam is our managing director and a fully AAT-certified accountant. Adam founded Short Accounting in 2014 with the aim of helping business owners with their accounting and tax needs so that they can focus on growing and managing their businesses.
Over the years Adam has helped thousands of SMEs, sole traders, limited companies and more with the full range of accounting services. He’s a firm proponent of adopting the latest in accounting tech to help streamline processes to ensure that all of our clients get the best service possible.
