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Making company dormant

I've been director of a company for the past six years with my son as co-director; and both of us and my wife are shareholders. It is our intention to disincorporate the business with myself becoming sole trader. I've looked at the info on Companies House website and have form DS01 at the ready; the company hasn't conducted any business since the end of November 2012 and the end of year falls at the end of February 2013 which meets the requirement of not having traded for three months. However, the problem is how to distribute the cash and assets of the business - clearly not one penny of worth wants to remain on the balance sheet following disincorporation as this would pass to the Crown (bona vacantia).

So I wondered if it would be allowable/practical to make the company dormant in the short term - maybe for one year - while the assets are distributed prior to disincorporation. Can somebody tell me what is involved in making a company dormant? Can it still have assets on the balance sheet and can they be distributed during this dormant period without disqualifying it from being classed as domant? I am about to conduct my first bit of business as a sole trader (whoopee!) so I need to sort something out quickly.

Thanks in advance for any help.

David.

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By johnt27
22nd Feb 2013 13:45

No such thing as disincorporation at the moment

Dependant upon what good old GO does in his budget in a few weeks there is no such thing as disincorporation or disincorporation relief.

A company is deemed to be dormant once it is no longer carrying on a trade, earning any income including interest or likely to generate any capital gains. However if you have started up on your own and are utilising the assets of the company then it is hard to argue that the company is dormant as it will be providing assets on an informal licence. This could amount to a change of trade which makes life even more complicated!

If you want to transfer the existing business that operates as a company and start doing the same business as a soletrader/partnership the company and the shareholders may incur additional tax charges.

This is because any transfer of assets/value will be between connected persons and will have to be done at market value. The company may have balancing charges or capital gains on any assets owned and the effective distribution of these assets if not paid for in cash will be deemed to be a distribution ie dividend to the shareholders which will be subject to income tax.

The company will cease to trade at the point of transfer and will become dormant - at which point you may consider striking it off.

You would also need to notify HMRC that you have started a business or risk a penalty.

If the company doesn't have sufficient reserves to make the distribution then this will be deemed to be an illegal dividend making the shareholders liable to refund any balance owing on demand. To avoid the distribution route you could take assets out via directors loan accounts, but if these become overdrawn a 25% tax charge and P11D benefit charge would be payable by the company. This would make it difficult to strike the company off.

Based on the above you may be better to wait until March to see what sticks to the wall in the budget.

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