Firstly, a dormant company isn’t simply a closed company. There are a few rules to owning a dormant company you must meet if you wish your company to be classified as dormant.
So, what is a dormant company and what reasons are there for becoming dormant? We delve into this and other frequently asked questions below.
There are two definitions of ‘dormant’ according to HMRC, one for Corporation Tax and one for Companies House.
A dormant company for Corporation Tax is one which:
· Has stopped trading and has no other income (such as investments)
· Is a new limited company that has not yet begun trading
· Is an ‘unincorporated association’ or club owing less than £100 Corporation Tax
· Is a flat management company
A dormant company for Companies House is a company which is registered with Companies House but which has had ‘no significant accounting transactions’ during its financial year. A ‘significant accounting transaction’ may be defined by any transaction which should be entered in a company’s accounting records.
For a company to be dormant for Companies House, its transactions must be limited to:
· Payment for shares
· Fees paid to Companies House for a change of company name
· Re-registration of a company
· Filing annual returns
· Payment of penalties imposed by Companies House
There are certain exceptions to these such as some financial companies who are required to file their full accounts regardless of their company status.
Why become dormant?
There a many reason why a company may become dormant either for Corporation Tax or for Companies House including: protecting a brand name or trademark, restructuring an existing business or to hold assets or intellectual property.
One of the main benefits is that whichever description a dormant company falls under, you will have fewer filing responsibilities, reducing the statutory burden on your company.
A dormant company is also exempt from paying Corporation Tax, provided it is dormant according to the description above. However, you must pay any outstanding tax liabilities before you can become dormant.
A company may be dormant as soon as it is formed, or it may become dormant. Either way, it is important to continue managing it in the correct way.
Each dormant company is still required to meet certain filing requirements.
As a dormant company you will still need to file annual accounts and a confirmation statement to Companies House. You must do this whether your company is dormant for Corporation Tax or for Companies House.
Making an active company dormant
To make an active company dormant, you must inform HMRC that your company is dormant as soon as possible. However, you will not be required to inform Companies House that your company is dormant until you need to file your annual accounts.
To inform HMRC, you can send a letter or contact them by phone. You must do so within three months of your company becoming dormant.
If your company had employees, you will be required to pay any remaining wages and close your existing PAYE scheme.
You must also deregister for VAT within 30 days of becoming dormant.
If you want to be dormant only temporarily and plan to begin trading again in the future, you need to continue sending empty VAT returns while your company is dormant.
As dormant companies cannot spend or receive any money without becoming active for Corporation Tax, it is best to close business bank accounts to ensure no income is received.
Making a dormant company active
If you have a dormant company and wish to become active, you must inform HMRC within three months of the company becoming active.
For companies which have been active in the past, this is as simple as signing into your HMRC account and changing the status of the company to ‘active’ for Corporation Tax.
For companies who have never traded, you will need to register for Corporation Tax.
You may also need to register for VAT if you expect your turnover to be over the VAT threshold (£85,000 for 2019/20 tax year).
You do not need to inform Companies House when your company becomes active again, as this will be clear when you submit your annual accounts.
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