A company can be dormant for several reasons. For example, it could be inactive due to insolvency, bankruptcy, liquidation, etc. In such cases, there is nothing much you can do about it. However, there is another type of dormancy called ‘inactive’ or ‘passive’, where a company carries out no business activities. This does not mean that the company is dead; rather, it is just lying low.
There are two different meanings of ‘dormancy’: one is the strictest meaning and the other is less rigorous. The strictest meaning of dormancy is the state of being inactive. A company cannot perform any business activities while in this state. On the other hand, the second definition of dormancy refers to the state of doing little or nothing. If a company is carrying out no business activities, it is considered dormant.
In some countries, companies can be declared dormant even if they are active. For instance, in India, a company can be declared dormant if it fails to pay taxes within three months of filing returns. Companies can also be declared dormant if they fail to file annual returns for five consecutive years. Similarly, in the UK, a company can be deemed dormant if it fails to file accounts for six consecutive years.
The main reason why a company becomes dormant is because it has ceased trading. When a company ceases trading, it stops paying employees and suppliers. As a result, the company loses money. Once a company starts losing money, it eventually goes bankrupt. After declaring bankruptcy, the company ceases operations completely.
If a company is dormant, it is not necessarily dead. Rather, it is just lying quiet. You can revive a dormant company by restarting its business activities.
For corporation tax purposes, this is the definition of a dormant company.
A dormant company is defined as one which does not trade or earn income. In order to determine whether a company is dormant, HMRC looks at how much it earns over the previous three financial years. This is known as the “relevant period”. For example, if a company earned £1m during the relevant period, it is considered to be trading. However, if the company didn’t make any profit, it is still classified as dormant.
Companies must file an annual Corporation tax return if they are deemed to have been active. If a company isn’t making a profit, it cannot claim deductions against profits made in the following tax year.
If a company hasn’t filed its annual Corporation tax returns, there could be consequences. These include fines being imposed, penalties being applied, and interest being charged.
Companies House needs a definition of “dormant company”
A dormant company is one that does not carry out any significant accounting transaction during the period of dormancy. A dormant company must also satisfy certain conditions relating to size and duration of dormancy.
Private companies qualify if they meet these criteria. If a company qualifies as a private company it will automatically become a dormant company. However, if a company ceases to be a private company it becomes a dormant company.
The following list contains some examples of what constitutes a dormant company:
• A company whose accounts do not show any material changes since the previous financial year
• A company that has not carried out any significant accounting transactions for three or more consecutive annual periods
• A company that ceased trading within the last five years
• A company that had a total turnover less than £2 million in the last 12 months
1 The people who signed the memorandum of association pay for their shares.
The shareholders of a company are those people who pay money for the shares of the company. They become owners of the company. In case there are no initial investors, the company needs to raise funds from outside sources. This is done via subscription. The subscribers pay money for the shares in advance. Once the company raises enough funds, it issues shares to the subscribers. These shares represent ownership of the company.
2 Fees paid to Companies House
Companies House will charge £14 per filing next year for companies that pay the annual corporation tax bill. This includes those paying VAT, PAYE, NICs, capital gains tax, inheritance tax and corporation tax.
A company can change its name if it pays a fee. If the company changes its name, it must file a notice with Companies House within 14 days of the date of incorporation.
If the company does not want to continue being dormant, it needs to register as a limited company. If it wants to become a public limited company, it must apply for registration with Companies House.
The fee for each application will cost £100.
3 Payment of a civil penalty for accounts that were not filed on time
A company loses dormant status if they pay a civil penalty or incur a charge. This is because they are no longer considered to be a dormant company. They do not qualify for interest on a bank account and cannot pay dividends without losing their dormant company status.
Payment of an invoice of £1,000 and under does not cause a significant accounting transaction. But, paying an invoice above £100 causes a significant accounting transaction. In addition, payments of £10,000 or more must be reported to HMRC within 14 days.
There is no limit on the number of times a company can lose dormant company status. If a company loses dormant status twice, they will remain dormant forever.
If a company loses dormant status due to unpaid wages or dividend payments, they can regain dormant company status by making up those payments.
Accounting transactions should be covered by a different company before being paid out of the dormant company’s bank account.
Making it easy for companies that haven’t traded in a long time
The UK government is trying to make it easier for businesses to submit dormant company accounts. The aim is to simplify the process of submitting dormant accounts and help prevent companies being used to evade tax. In response, HM Revenue & Customs (HMRC) has launched a simplified form called AA02. This allows you to file a dormant account without having to go through the whole application process.
A lot of dormant companies are registered by people who want to use them to avoid paying tax or registering for VAT. These companies aren’t trading, but they still need to keep records of what they did while they were active. If they stop trading, they become dormant and no longer need to keep those records. But if they continue to trade, they need to update their accounts every year.
There are around 2 million dormant companies in the UK. They are usually set up by people who do not want to pay tax or VAT. And because they haven’t been trading for some time, there isn’t much information about them online. So it can be hard to find out whether they are still trading or not.
If you find a dormant company that hasn’t updated its accounts for several years, you could ask them why they stopped trading. Or you could check whether they are still trading by looking at their annual return.
What’s the difference between a company that is dormant and one that doesn’t do business?
A dormant company is one which has been inactive for three years. This happens because there is no longer anyone actively working in the company and it doesn’t have a trading history.
Nontrading companies are ones which do not trade or sell any goods or services. These companies are usually set up to provide specific services or support to other companies.
There are two types of dormant companies – 99999 and 74990. Companies that have been inactive for over 3 years fall into the 99999 code. Those that have been trading for under 3 years fall into the 74990 code.
Frequently Asked Questions
What do banks need from a company that is no longer in business?
While you will need to have an active company bank account for your active business, it is wise to NOT use a business bank account for a dormant company. This is because dormant companies are not allowed access to funds, while businesses do require access to cash.
Essentially, since dormant companies are unable to make payments, they don’t need to maintain a business bank account. If, however, your company spends or receives any money, it will automatically become active for Corporation Tax purposes and will therefore require a business bank account. Should your company spend or earn money whilst dormant, it will be classed as an active company and will require a business bank account to continue operating.
Should your company choose to go into hibernation, you will need to ensure that any existing business bank accounts are closed down. Otherwise, you could find yourself facing hefty fines for failing to declare a change of status, or worse still, losing your company registration altogether.
As mentioned above, even the smallest action, such as making a payment, will cause your dormant company to reclassify itself as active. Therefore, you must always keep careful track of what happens to your company bank accounts, and act accordingly.
How long can a company remain dormant?
A company can remain in a dormant state indefinitely. A company can continue to file annual reports without having employees or operations. Directors are required to perform certain administrative tasks such as filing tax returns and paying taxes, but there is no time limit for doing those things. Companies can even remain in a dormant status for decades. In fact, many companies do just that.
Companies that go into a dormant status usually do so because it provides greater protection for owners. If a company becomes inactive, creditors cannot collect debts owed by the company. Additionally, shareholders may lose their voting rights. And finally, a company that goes into a dormant status does not have to pay corporate income taxes.