What is a dormant company?
A dormant company is defined differently depending on whether it’s being used by HM Revenue & Customs (HMRC). If you’re registered as a limited company, you might think that you don’t need to do anything special to make sure that your company isn’t considered dormant. But there are some things that you need to know about what constitutes a dormant company.
If you’re registered as a sole trader, you won’t need to worry about this because you aren’t liable for paying corporation tax. However, if you’re registered as a partnership, you could find yourself having to pay corporation tax even though no one else does. This is because partnerships are treated like corporations for tax purposes.
When you register a company, there are certain requirements that must be met. These include keeping records of any payments made by the company to itself. You also need to keep records of how much money each partner receives.
What is a non-trading company?
A nontrading company is one that does not trade goods or services. This includes companies such as restaurants, bars, hotels, retail stores, and professional services firms. Non-trading companies do not generate profits or losses, and therefore cannot file corporate tax returns. They are required to pay corporation tax on any earnings they make during the year, regardless of whether they actually sell anything. In addition, a nontrading company cannot claim deductions for expenses incurred while operating.
Companies can continue to operate as a nontrading company for up to five years. During this period, they must still pay corporation tax on any gains they earn, but they do not have to file annual returns. If a nontrading company continues to operate beyond five years, it will become subject to regular taxation.
What makes a company “dormant” or “not trading”?
Companies House says there are over 2 million inactive companies registered in England and Wales. But what does it mean? And why do we care about them? We asked three experts to explain.
Nigel Huddleston, director of corporate governance at accountancy firm BDO, explains: “A dormant company is one where no trading activity has taken place within the previous 12 months.” A dormant company doesn’t need to file accounts with Companies House. So, even though it might still exist, it isn’t doing anything useful.
But a non-trading company is a completely different kettle of fish. It hasn’t traded since being set up, and it won’t trade again. In fact, it probably never had a purpose beyond setting up a limited company.
And while a dormant company needs to pay tax, a non-trading one doesn’t – unless it wants to start trading again.
So, how many companies are actually dormant? Well, according to Companies House, around 2.3 million. But Nigel thinks that number could be much lower. He believes the real figure is closer to 5 million.
Why does he think that? Because some companies register themselves as dormant without ever intending to stop trading. They just want to avoid paying tax.
That’s because you can choose whether you’re a trader or not. If you’re a trader, you must keep records of every transaction you make. You have to pay corporation tax on those transactions. But if you’re not a trader, you don’t have to record your income or expenses.
What is going on for the purposes of Corporation Tax
Generally, companies will be deemed to be active for Corporation Tax purposes where they carry out activities which produce taxable profits or gains. However, there are many different ways of defining what counts as such an ‘activity‘. For example, whether a particular thing is carried on for commercial reasons might depend on how much profit it generates.
Some people believe that carrying on a business doesn’t necessarily mean that you have to pay Corporation Tax. This isn’t correct; even though you don’t make a profit, you still have to pay tax on anything you earn.
Tell HMRC that your business or organization is now up and running.
To register with HMRC, it is important that you are able to prove that your company or organisation is no longer dormant – i.e. that it is carrying out some form of trade activity. This includes things such as providing goods or services, running events, selling products or offering training courses. If you want to register with HMRC, there are three ways you can do this: Online; By post; In person.
If you want to register with us online, you’ll need to log in to HMRC’s online system – www.hmrc.gov.uk/register. Once logged in, follow the instructions to complete the process.
You can also use our online system to register with HMRC by sending a paper application form to HMRC. Alternatively, you can call us on 0300 123 5000 and we will provide you with the appropriate forms.
If you’d prefer to register with us in person, you can contact us directly. We operate a drop box scheme in most areas across England and Wales. Please note that you will need to bring along evidence of your identity and address.
What doesn’t work for the purposes of Corporation Tax
The law does not define what constitutes carrying on a business. However, it is clear that certain types of activity do constitute carrying on a business. For example, if you provide a service such as cleaning windows or mowing lawns, you are carrying on a business. You must charge VAT on your sales and make the relevant returns. If you sell goods, you must register for Value Added Tax (VAT).
If you run a shop selling clothes, you are carrying on business because you are buying and selling clothing. If you buy and sell cars, you are carrying on another type of business. You must charge GST on your purchases and make the relevant returns to the Australian Taxation Office.
If you work for someone else, you are probably carrying on a business. This includes working for yourself if you are self employed. Your employer must deduct income tax and Medicare levy from your wages and pay these amounts to the ATO.
You cannot claim deductions for expenses incurred while carrying on a business unless you meet one of three tests. These are:
1. You are running a business out of home.
2. You are engaged in a hobby.
3. You are involved in a sport or recreation club.
When your business or group hasn’t started trading yet
The UK government has announced that pretrading activities and pre‑trading expenditure are not considered to be trading activity under corporation tax law. This means that no Corporation Tax liability arises until you start trading. In effect, the decision removes the risk of being hit by a surprise £1,000,000 bill.
This change applies to companies or organisations that have been incorporated since April 2017. If your company or organisation was formed prior to April 2017, the rules remain unchanged.
If you are unsure whether your company or organisation qualifies for this exemption, please contact us.
When your company or organization used to do business but no longer does so
HM Revenue & Customs (HMRC) has announced changes to how companies are treated when they cease carrying on business. From April 2018, HMRC will consider companies to be dormant if they haven’t carried out any business activity since their last trade date. This includes things like paying bills, renewing licences, filing tax returns, etc.
Your company must notify Companies House within three months of ceasuing to carry on business. If you don’t do this, HMRC will assume that you’ve ceased trading and treat your company as dormant.
Once your company becomes dormant, you won’t be able to re-enter the market again until the end of the 2023 deadline. You’ll have to wait until that date to apply for a new registration number and start up again.
What does dormant mean when it comes to Corporation Tax?
Shell companies are sometimes used by people who wantto avoid paying corporation tax. But what exactly do you need to know about dormant companies to make sure you’re not accidentally setting yourself up for trouble? Here we explain how it works…
When HMRC will stop counting clubs and other groups that aren’t corporations as active
HM Revenue & Customs (HMRC) has announced that it will no longer consider clubs, societies and unincorporated associations as active businesses for taxation purposes. This decision follows a consultation earlier this year where HMRC received feedback from stakeholders including the Association of British Insurers (ABI), the Chartered Institute of Taxation (CIOT), the Federation of Small Businesses (FSB), the Institute of Chartered Accountants in England and Wales (ICAEW), the Law Society and the Royal Institution of Chartered Surveyors (RICS).
The announcement came following a review of the rules surrounding dormant companies. In April 2018, HMRC published draft guidance setting out how it intends to apply the existing rules around dormant companies to unincorporated associations. At the same time, the government asked for further views on whether there should be a change in the law to allow dormant companies to continue trading without paying corporation tax.
In response, the ABI submitted evidence to HMRC arguing against changes to the current rules. However, the CIOT, FSB, ICAEW, RICS and the Law Society argued that the existing rules should be changed to reflect the way that people use unincorporated associations today. They suggested that the rules should be amended to ensure that dormant companies do not continue to trade while being taxed.
Following the consultation, HMRC confirmed that it would make no changes to the rules governing dormant companies. Instead, it stated that it would now look at applying the existing rules to unincorporated associations, such as clubs and societies, rather than making a separate set of rules specifically for those types of entities.
This means that clubs and societies will no longer be considered as active companies for taxation purposes. As a result, they will not have to file returns or pay corporation tax for up to three years. During this time, they will still be able to carry on running their activities and memberships will not be affected.
However, some clubs and societies will still require registration under the Charities Act 2011. These include registered charities, trusts and religious bodies. For example, a charity cannot register unless it meets the requirements of the Charities Act 2011, and a trust cannot register unless it meets certain conditions.
For unincorporated associations that do not qualify as charities, trusts or religious bodies, the new rules mean that they will no longer be required to file a return if they earn less than £1,000 per annum. If they earn more than this amount, they will still have to file a return.
Frequently Asked Questions
If my company is listed as “dormant,” do I still have to pay tax on it?
If you want to avoid paying taxes, you’ll need to do some research into what constitutes being “dormant.” If you don’t pay any wages or VAT, then you could potentially claim that your company isn’t active enough to require registration. However, there are certain circumstances where you might still be liable for tax. For example, if you haven’t paid any tax since registering the company, then you may be required to file returns. You may also be liable for unpaid VAT if you haven’t registered the company to collect it.
In addition, if you’ve been trading as a sole trader, then you’ll need to consider whether you’ve had sufficient income to justify registering as a limited company. In most cases, companies must earn at least £83,000 per annum to qualify for incorporation.
What’s a non-trading or non-active company?
HM Revenue & Customs says that if your company hasn’t begun trading yet, then it’s not active for corporation tax purposes. This does not prevent you from setting up your company and getting the ball rolling. However, it does mean that your company is considered to be inactive if trading hasn’t actually started.
As long as your company doesn’t engage in any profit- making activities, you can carry on doing early-stage business activity such as writing business plans and negotiating contracts without being considered to be non-active. You can continue to do this even though you haven’t started trading.
These early-stage activities include things like:
•Writing business plans and negotiating contracts
•Setting up bank accounts
•Getting insurance cover
•Registering trade marks