Dormant companies: Get the details right (2015 update)
This article has been updated as at September 2015.
Look up the word ‘dormant’ in the Collins English dictionary and you find two definitions: ‘temporarily quiet, inactive, not being used’ and ‘alive but in a resting condition’, explains Jennifer Adams.
Companies House and HMRC have different ideas; in fact each use different definitions for what they class as a ‘dormant’ company. This article describes ‘dormant’ as per these definitions and details what needs to be done to keep a company ‘alive ...but... resting’.
- GP2 (‘Life of a company)’ Chpt 9 uncompromisingly states that ‘If a company has made no ‘significant accounting transactions during the accounting period' then it is deemed to be dorman’. A ‘significant accounting transaction’ is one which a company would usually enter in its accounting records except for the following: (s1169(3)(b) Companies Act 2006):
- Annual return fee>
- Penalty for late filing of previous accounts
- Fees paid for a company name change or re-registration
- Receipt for payment for shares taken by members
Any other transaction makes the company non-dormant so an expense as basic as a bank charge means dormant accounts cannot be submitted. Formation costs should also be paid privately and not by the company.
Consider a company to be dormant when it:
- is not 'active' ie not engaged in any business activity or receiving income or profits
- holds no assets capable of producing any profits or income
- holds assets that are unlikely to produce profits and income in the near future
- Companies House do not have to be informed of a company's dormant status until the annual accounts are due.
- An Annual return (AR01) still needs to be submitted as at the date of anniversary of incorporation or of the last Annual Return plus filing fee. Trade Classification = 9999.
- Abbreviated balance sheet and notes are required every year if the company has traded and then becomes dormant. The balance sheet must contain a statement that the company was dormant throughout the period.
- The accounts can be filed online. Dormant companies that never traded can also use the paper form AA02 DCA (Dormant Company Accounts).
- Normal submission dates and late filing penalties apply.
- Companies House will automatically advise HMRC of a company incorporation.
- HMRC sends a confirmation letter to the company at the Registered Office which includes the company's Unique Taxpayers Reference.
- If the company is dormant from the date of incorporation, HMRC should be notified otherwise they will assume the company is 'active' and expect to receive annual returns.
- After notification of the dormant status no requests for submission of tax returns will be issued but every subsequent five years HMRC will write to the Registered Office address enquiring as to whether the dormant status remains.
- HMRC needs to be advised when the company starts trading; notification being no later than three months after the accounting period has commenced. An accounting period commences when a company starts trading or acquires a source of income. Notification can be online 'Set up a private limited company'.
Why retain a ‘dormant’ company?
- A large proportion of dormant companies are flat management or investment holding companies whose sole reason for being is to own a fixed asset, usually the head lease or freehold of a property with no ground rent. A separate Residents' Association company deals with any management income and expenses.
- Dormant companies that do not own assets or have not traded are likely to have been formed to protect a company name in anticipation of a future trade or some other commercial purpose.
- Some companies may be dormant for a period whilst being wound up.
- Owners may wish to retain the company in case they decide to recommence trading. However it is cheaper in filing fees for a company to be struck off than to remain dormant following cessation of trade unless needed for a particular reason.
- To retain dormant status any costs (which would include accountants fees but not those indicated under ‘Definitions’ above) should be paid by someone other than the company otherwise the company is not dormant.
- Although the accounts filed may be abbreviated accounts and not contain the directors report, the copy circulated to shareholders should be full accounts and accordingly a directors report is required.
- There is no requirement for a company to have a bank account but if there is an account it must be a non interest bearing account.
- Dormant companies are exempt from the need to display its registered name at the Registered Office.
- Due to the lack of financial data, a dormant company cannot be assigned a credit score rating or limit.
- A company can remain dormant indefinitely so long as Companies House filing regulations are adhered to.
Jennifer Adams FCIS TEP ATT (Fellow) is Associate Editor at AccountingWEB. A professional business author specialising in corporate governance and taxation, she has written for many of the leading specialist providers of legal, tax and regulatory publications. Jennifer runs her own accounting and consultancy business with offices based in Surrey and Dorset.