The term “dormant company” refers to a situation where a company does not pay corporation tax because it is no longer active. This could happen due to a number of reasons, such as lack of capital, lack or management expertise, insolvencies, etc.
Corporation Tax Act 2006 states that a company becomes dormant if it fails to file accounts within 3 months of becoming inactive. If a company doesn’t file accounts within 3 months, it won’t be able to claim corporation tax deductions for the following 2 years. However, there are exceptions to this rule. For example, if a company files accounts late, but pays the outstanding amount of tax within 30 days, the company isn’t considered dormant.
There are several ways in which a company can avoid being declared dormant. Companies House explains how to remain active and avoid being declared dormant.
For corporation tax purposes, this is the definition of a dormant company.
A dormant company must pay corporation taxes. This includes companies which are inactive due to bankruptcy, liquidation, closure, cessation of trading, dissolution, winding up, amalgamation, reorganisation, merger, acquisition, change of control, transfer of assets, sale of assets, etc.
Companies which carry out activities such like investing, paying dividends, lending money, etc., will never been seen as dormant. For example, a company which sells products online will always be carrying on a trade or business.
Companies House needs a definition of “dormant company”
The UK government’s Companies House uses a stricter dormant company definition than HM Revenue & Customs. A dormant company is one that does not meet the following criteria:
• Has no employees
• Does not generate income
• Is not trading
• Has no shareholders
Companies House says it applies this definition because it wants to ensure that people are paying taxes where they live rather than avoiding them.
HMRC’s definition is broader, including companies that do not meet the above criteria, but still have some value. For example, a company could be trading without having any employees. This is why HMRC includes companies like Amazon, eBay, Facebook and Uber among those that fall under the dormant company definition.
1 The people who signed the memorandum of association pay for their shares.
In most cases, the payment of shares is made before the start of trading. This is because it is usually done before the company starts trading and therefore it does not affect the market price. However, there are different ways to handle this payment. For example, some companies pay the shares directly to the shareholders. Other companies issue bonds and make interest payments on them.
There are many types of shares. Some are called ordinary shares and others preferred shares. Ordinary shares represent ownership interests in the company. Preferred shares give the holder certain rights such as voting rights, dividends and liquidation preferences.
When a company is incorporated, there must be a record of how many shares have been sold. This is known as the memorandum of association. If you want to know what happens to the money raised, check out our guide here.
2 Companies House charges
Companies House charges a fee for every document filed with it. This covers the cost of processing documents and providing information about companies.
The fee structure varies depending on what type of document you file. A typical charge is £20 per document plus VAT. There is no charge for registering a new company.
Fees paid to Companies House are deducted from the amount owed to HM Revenue & Customs (HMRC). If you owe money to HMRC, you must pay Companies House before paying HMRC.
3 The payment of a civil penalty for late account filing
HM Revenue & Customs (HMRC) automatically imposes penalties against companies that are late in submitting their annual tax returns. These penalties are called “automatic penalties” because they apply without reference to whether the company has been negligent. They are imposed regardless of whether the company has actually done anything wrong.
If a company is late in submitting its accounts, then HM Revenue & Customs will impose an automatic penalty equal to 5% of the total value of the accounts. For example, if you submit your accounts on 31 January 2020, HMRC will assess a penalty of £50.00.
The penalty applies to the whole year and does not reduce over time. However, if the company files its accounts within one month of the end of the financial year, then the penalty will be waived.
In addition, if a company is late in paying its corporation tax liability, then it will also be subject to an automatic penalty.
This penalty is assessed on the basis of the total value of accounts filed. Therefore, if you file accounts for the previous year on 30 June 2020, HMRC will calculate the penalty based on the total value of those accounts.
For example, if the accounts for the previous year had a total value of £1 million, HMRC would assess a penalty of £5,000.
A company can appeal the imposition of an automatic penalty. A decision on the appeal cannot be appealed further. Appeals must be submitted either to HMRC or to the First-tier Tribunal (Taxes).
Facilitating the process for inactive corporations that have never traded
For the very simplest dormant companies, there is a new streamlined form called Form AA02, which makes it easier for those companies to apply for approval. The form is designed specifically for companies that have been inactive for over 10 years, and it requires less information than the current form.
The updated form is shorter and simpler, requiring fewer documents and fewer questions. It also allows applicants to submit supporting documentation electronically.
There are several advantages to submitting a request for Form AA02 approval online. Firstly, it saves you money because you don’t have to pay Companies House to process the application. Secondly, you’re able to access the form 24/7. Thirdly, you’ll receive an email confirmation once we’ve processed your submission. Finally, you can view the status of your application at all times.
We recommend using our online filing system for Form AA02 applications. You can find out more about how to file here.
If you’d like to know more about making it easier for dormant companies that have not had trading activity since inception, please contact us here.
What distinguishes a dormant firm from a non-trading company?
A dormant company is an inactive corporation whose shares aren’t traded on any stock exchange. These companies are typically shell corporations, where the directors and officers are just holding onto the assets for future use.
Nontrading companies don’t trade their shares on any exchange. They’re usually private companies who operate under no shareholder structure.
The rules governing dormant companies and nontrader companies are quite different. For example, a dormant company cannot pay dividends or make capital expenditures. However, nontrading companies can do both.
Frequently Asked Questions
Does my dormant firm have to pay taxes?
The government introduced a rule change about three months ago, which allows dormant companies to avoid paying any tax for up to six years. This applies to companies where there are no employees, no assets and no turnover. In addition, the government does not require the company to file accounts during this time.
However, if a company was formerly trading, it must pay outstanding tax liabilities to HM Revenue & Customs (HMRC). These include unpaid corporation tax, national insurance contributions and VAT. If you fall into this category, contact us immediately for advice.
How do I make a dormant company active?
If and when you are ready, to make your dormant company become active again, you must contact HM Revenue & Customs (HMRC). This includes those companies that have been inactive for three years or more. Inactive companies cannot apply for registration under the Company Incorporation Services Regulations 2016. However, there are exceptions to this rule. For example, if your company carries on some kind of business activity; receives any form of income; employs anyone; or makes payments in respect of any debt or loan, then this will mean that your company is still considered to be trading and needs to register.
Your company will be making its first tax return once it becomes active. To avoid paying too much Corporation Tax, you should aim to complete this process as soon as possible. Once you have done so, you will no longer be able to carry on any kind of business activities without being registered.