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’.
Definitions
Companies House
- 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.
HMRC
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
Relevant Returns
Companies House
- 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.
HMRC
- 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.
Misc points
- 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.
Replies (21)
Please login or register to join the discussion.
Thanks
I thought this was a really useful article. Concise and well written. Thanks. I have saved it for future reference.
Dormant companies
Amen!
I have saved it too.
Dormant companies
Really useful and clear. My thanks to the author.
very helpful
thank you
Much Appreciated
Clear, concise, no waffle - much appreciated. My thanks to the author for his efforts and for bringing these differences to my attention.
Apology
Please accept my apologies Jennifer - don't know where that "his" came from! :-)
Dormant companies holding freehold (so called flat management)
Great article!
Just one point: it is unlikely that a company holding the freehold will be dormant. This is because ownership of the freehold usually brings an income in the form of a ground rent. Even though the ground rent may be peppercorn, or in any case be very small, it is still income that should be recorded in an income statement. The reserves shown on the company's balance sheet may also change from year to year as a consequence.
Dormant Companies- A question
Thanks to the author!
A question:
my client got an Acknowlogement letter of dormant company from HMRC which he never told HMRC that the company is dormant( in fact the company is dormant), I can think of two possible reasons:
1, the company filed Annual Return to the Companies House which shows it's dormant, the information forwarded to HMRC.
2, the HMRC never heard from the company after sent out the CT41G,
but if the 2nd case the HMRC also can send pnalty notice if they not heard from the company after 24 months i.e. the normal tax return deadline.
does anyone knows why the HMRC send these Acknologement letter of Dormant company?
thanks
Associated for tax
Would a dormant holding company that received a dividend from its 100% owned sub, and crucially did not pay out this dividend out in full, be automatically considered an associate of the sub for CT purposes?
theory v reality @ Companies House
Many remark that Companies House remind them that their role is merely to have up to date information. Consequently, anyone who has incorrectly filed dormant (or any other) accounts in the past but where current correct accounts have been filed can leave things as they are.
This was demonstrated recently where I came across a company which had filed dormant accounts for it's first 3 years of existance. Six months later it filed amending accounts for the 3rd year, showing substantial trading activities and with comparative figures that indicated trading in year two. I subsequently came across a company cheque for £500 made out 2 month's after incorporation.
I am now on my third attempt to get Companies House to even query any of this with the company, including why the various statements required to appear on amending accounts are nowhere to be seen.
I have no doubt that HMRC will only have seen year 3 MKll
This is not an isolated incident and it does make me wonder why we bother to learn & practice all this stuff.
Associtaed for tax
@Matthew Pratt - the answer to your question is probably not but maybe! Have a read of CTM03590, 'Non-Trading Holding Companies' secton at the bottom of the page which refers to SP5/94 which is now enacted as CTAs2010 s25 and 26. In particular s26 is relevant to your question. [Shame the manual isn't yet updated.]
Freeholds
Actually I live in a block of flats where the company scenario is as Jennifer suggests. The flatowners are the shareholders, the Freehold is owned by a dormant company and there is no ground rent.The management fees go to a separate company.
Freehold and Dormant companies
I too live in a block of flats and am a shareholder in the freeholding company. Based on legal advice, we distinguish ground rents from service charge income. The former is recorded in the freeholding company's accounts (and hence it can not be a dormant company) because the company has absolute title to these amounts. The latter is not accounted for in the freeholding company's accounts and are held in trust for the benefit of the lessees so that the freeholding company has no absolute title. I am surprised to hear of a freehold for which no entitlement to ground rent exists.
Freehold and ground rents
It was my understanding that the ground rent (and other charges perhaps) derive from a lease not a freehold. So whilst the company may own the freehold or headlease (and the subleases to the flat owners) and if that's all it does, as Jennifer says, it can be regarded as dormant. The rent derived from the subleases must belong to another entity somehow though, maybe through a trust or subsidiary of the freehold owning company. Anyone got the legalities nailed?
Who owns the ground rents if the freeholder doesn't?
A freeholder who does not create leases (long or short) on a property will not derive an income from the property. Under those circumstances, a company owning a freehold may well be dormant. A freeholder that has created leases is active and is deriving income from the leases via ground rent. The service charges are (at least in theory) to defray the management, insurance and repair costs incurred by the freeholder.
Can a Dormant company sell shares?
A parent company was declared dormant by the accountant. However, during the time this company was dormant, shares were sold to several people for thousands of pounds. The money received for the shares was paid into the bank account of another company within the group and the parent company continued as dormant. When this matter was raised with the accountant, he said that the parent company was still dormant. Is this correct?
If a close company is to become dormant should it sell all of its fixed assets back to the directors.
Thanks
Addition/update on HMRC form CG41G
A few weeks after this article was loaded onto the site HMRC changed their system. Now they are advised by Companies House that the company has been formed but there is now no longer a form CT41G (Dormant) to submit. Instead HMRC send a letter (named CT41G) to the company’s registered office which includes the company’s new UTR. HMRC only want to be notified when the company becomes ‘active’ and this can be done online under the section 'Register for HMRC taxes'. This leads to an online form requesting the same info requested on the printed CT41Gs. Completion enables the date of trading to be specified along with the accounting period dates etc.
Everything else as detailed in the article remains the same.
A few weeks after this article was loaded onto the site HMRC changed their system. Now they are advised by Companies House that the company has been formed but there is no longer a form CT41G (Dormant) to submit.
Instead HMRC send a letter (named CT41G) to the company’s registered office which includes the company’s new UTR. HMRC only want to be notified when the company becomes ‘active’ and this can be done online under the section 'Register for HMRC taxes'. This leads to an online form requesting the same info as on the printed CT41Gs. Completion enables the date of trading to be specified along with the accounting period dates etc.
HMRC therefore assume that the company is dormant until they are told otherwise.
Everything else as detailed in the article remains the same.
Freehold, Post cessation Expenses & Dormant Companies
I should be most obliged if someone can offer advice in respect of a company, which at the date of cessation had a freehold property on acres of land and a healthy bank balance. The directors have been unable to sell the property and expenses to maintain the property are incurred and paid from the company's bank account. The company has no other income against which expenses can be relieved. Furthermore directors paid personal expenses from the company's bank account. I informed the directors that as the company's reserves are being depleted and its bank account used to pay personal expenses, accounts will have to be prepared. The directors are husband and wife. His loan account is in credit but the wife's loan account after the expenses of the year is showing a substantial debit balance. The directors said that they spoke to a friend's accountant, who feels that I am trying to create work to generate fees especially when the company has ceased trading ( ceased July 2010).
Hi
Could you tell me why dormant subsidiaries cannot use form AA02? Is it because the controlling party must be identified in the accounts and the form AA02 has no field for this to be included.
Thanks
Hope this helps
My understanding is that controlling party disclosure is FRS etc and may therefore be omitted from abbreviated accounts
I'm putting it down to Companies Act SI2008/409 requirement to state name etc of company regarded by the directors as being the company’s
ultimate parent company
Quoting from Companies House:
"The AA02 form is not suitable for every dormant company, for example dormant subsidiary companies can not file a form AA02 as the form can not accommodate the specific details required to be submitted by dormant subsidiary companies."
Source:
Chapter 8 Section 6 of https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil...