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What is a Dormant Company?

You may start your business and register as a limited company, but you may not want to start trading straight away. This could be for a number of reasons such as the time not being right for you quite yet. The reasons are down to you, but what you can do inform HMRC and Companies House that your company is "Dormant".

Having your company as dormant while you're not trading, means you don't have to pay any corporation tax. Just remember that you'll need to inform HMRC as quickly as possible that your company is dormant for their records. You can notify them via post, email or over the phone.

When can a limited company be classified as "Dormant"?

In order to register as dormant you need the following circumstances to apply, meaning you have no significant activity of:

  • Being in receipt of dividend payments
  • Earning any bank interest
  • Issuing shareholders' dividends
  • Managing investments
  • Running payroll
  • Paying bank charges or fees
  • Paying directors' salaries
  • Paying company formation costs through the business bank account
  • Purchasing / renting property
  • Buying and selling goods / services

If you are registered as dormant but begin to carry out any of the activities listed above then you will immediately lose the dormant status and will be seen as an active company. This means you will need to begin paying Corporation Tax.

There are certain activities and transactions that can be carried out by a dormant company. These include:

  • Payments for shares made by the initial shareholders
  • Fees and charges paid to Companies House for filing an annual confirmation statement
  • Payment of late filing penalties to Companies House

Reasons for choosing to become dormant

One of the most common reasons to register a limited company just to make it dormant is to protect the chosen brand name. This prevents anyone else from using it for their company.

This is often done during the planning stages of setting up the business; it can happen months, or years, before the company launches. Securing your brand name early can provide a solid base to build the company around.

Sometimes a business registers a dormant company in a name similar to their own in order to prevent anyone else from registering it. This is done to protect their image and prevent confusion between two separate companies.

Another reason can occur during company restructuring. This is where the company is being split into several, smaller, companies. The sectors of the business that are being moved can remain dormant until the split is finished and they start trading.

Dormant company compliance

In order for your company to remain listed as dormant there are several requirements that you will need to keep on top of. These include:

  • Annual Accounts:
    • You still need to prepare your accounts for Companies House in the same way that you would for an active company.
    • This includes a balance sheet even if there is no active trading taking place.
  • Confirmation Statement:
    • Every company needs to provide a confirmation statement.
    • It is completed in order to confirm the details which are currently held about the company.
    • You should use to report any changes about your company.

Changing your Dormant Company Status

When you start trading, you'll need to inform companies house within 3 months. This can be done through the Companies House online portal.

If your company has always been registered as dormant, you will need to register for Corporation Tax. In order to do this, you will need your company UTR (Unique Taxpayer Reference) number which is issued when the company is incorporated.

When you begin trading for the first time, you'll need to supply HMRC with the following information:

  • Company name (in full)
  • Company registration number (CRN)
  • The start date of your business activities
  • The main address where your business activities are going to be carried out
  • The nature of your business activities
  • Your accounting reference date (ARD)

What about making an active company dormant?

If your company has previously been trading but has stopped for any reason and you don't wish to completely close it down. You can contact HMRC's Corporation Tax Office and inform them that your company has ceased trading and you wish to make it dormant. HMRC will then issue you with a Notice to deliver a Company Tax Return' to your registered office. This needs to be completed and returned to HMRC as soon as possible. You will then be required to pay any Corporation Tax due on any profits made prior to your company being made dormant.

If your company was VAT registered, then you must also tell HMRC that your company has ceased selling VATable goods or supplies and that you wish to cancel your VAT registration. This needs to be done within 30 days of your company being made dormant. You will then need to file a final VAT return.

It is a good idea to close any bank accounts linked with your company. This way there will be no risk of financial transactions happening while your company remains dormant.

Conclusion

Setting up a dormant company can seem like a good idea to begin with, but there are several considerations you need to keep in mind. From accounting for it, to confirmation statements, it's not as simple as it may seem. Hopefully this post has highlighted some of the pros and cons towards having your company registered as dormant.

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