Multiple reasons compel a company to be dormant. Being a dormant company doesn’t mean that a business is free from tax implications. It is possible to turn a dormant company into an active one. The rules and regulations for maintaining the company’s status as dormant differ based on location. If you want to learn more about the dormant company, its purpose, and tax-filing obligations, this article is for you.
What does it mean when a company is dormant?
A company is said to be dormant when it is in inactive mode. When a company ceases operations and does not generate any form of income, it is considered dormant. In the UK, the company remains registered at Companies House even if it is not operational, and the owner is required to file annual taxes and confirmation statements. A company can be in the dormant form from the date of incorporation. It is also possible that the company becomes dormant a couple of years after engaging in trading activity.
What is the purpose of a dormant company?
There are many reasons and purposes why one would register a company as dormant.
Registering a company you intend to use in the future
You might have some compelling trade ideas in mind for which you want to set things up in advance. Other than that, you might need to register a business to start trading in the near future. Having a dormant company allows you to trade at short notice as and when a client approaches.
Protecting your interests as a sole trader
You might want to start operating as a solopreneur, sole trader, or self-employed individual. For beginners, registering a business as a limited company may not be persuasive. In that case, registering your company as a dormant company makes sense because, as a sole trader, you get sufficient time to make other arrangements for trading.
Taking a break from business
If you are running a micro business or a small business, you might want some time off your busy schedule for other important things. For example, you might want to focus on your studies or take a maternity break. In that case, switching your company to inactive mode is helpful, as you can avoid tax payments and other formalities.
How do I make my company dormant?
Changing the trading status of your company to dormant or registering a new company as dormant requires you to follow a precise process. You must write to HMRC and state the date from which you want your company to be dormant. The application process takes around 15 days. As soon as the status of your company is changed from active to dormant, you receive a confirmation notification at your registered office address.
What happens when a company is dormant?
When you ask HMRC to register your company as dormant, you are not required to pay corporation tax. Moreover, you are not required to file a tax return unless you receive a notice. However, when your company maintains a dormant status, you need to file the annual accounts and confirmation statements with Companies House annually. If your company is small and dormant, you can submit a dormant account. No auditor’s report is required.
Can a dormant company have a bank account?
Avoid opening a new business bank account when your company maintains a dormant status. Choose an existing business bank account to avoid unexpected charges or payments, as both situations can forfeit the dormant status. For necessary transactions, you can use your personal bank account instead.
Can a company make or receive payments when dormant?
Using a business bank account, the only transactions a business can make include:
- Payments for shares,
- Penalties for late filing to HMRC,
- Payment of fees to Companies House for filing a confirmation statement.
Does a dormant company need to file tax returns?
No, a dormant company is not required to pay any kind of tax until it becomes active. If the company was trading previously, it will only pay taxes after resuming its active status. However, the previously traded company would be required to pay outstanding tax amounts to HMRC from the period of inactivity.
How do I close a dormant company?
If your company has never traded since its date of incorporation, it will not be susceptible to tax liabilities like VAT or corporation tax. You must contact HMRC to confirm your company status and check if closing the company would have any negative implications. As long as you can declare evidentially and legally that the company has never been involved in any trade activity or never indulged in any kind of capital gain from selling goods, services, or business assets, you are exempt from business taxes.
How do I make a dormant company active?
You must write to HMRC to inform them that your dormant company is operational again. When you contact HMRC, your company will automatically lose its dormant status and be considered active. To do this, you will need to follow the steps given below:
- Visit the HMRC official website and type in your company’s Government Gateway User ID,
- Collect the statutory accounts as well as the company’s tax returns within the company’s year-end,
- Register for corporation tax again,
- Send accounts to Companies House within the time period of 9 months prior to the company’s year-end,
- Send company tax return to HMRC,
- Pay the outstanding corporation tax within 9 months and 1 day of the company’s year-end.
Start a company in the UK with the expert guidance of Workhy
Are you planning to start a business in the UK? Registering a dormant company can be a great idea as you will have more time to make other operational arrangements. No tax liabilities apply, so you can reduce the hassle to some extent. Do you want to learn more about the process? Contact Workhy.
Workhy provides company formation services for entrepreneurs from all over the world and helps them establish their businesses online without having to travel to the UK. Our team of experts can help you with VAT & EORI registration, bookkeeping, business address registration, and opening online bank accounts in the UK.