Setting up a new limited company just to declare it dormant before it even starts trading might seem like an unusual thing to do. In practice though, there are several reasons why doing just that can be valuable.
In this article we take you through the following topics:
- What a dormant company is (including the different definitions for Companies House and for Corporation Tax)
- Whether to not you’re allowed to make a company dormant before trading commences
- Reasons why you might want to make your company dormant before trading
- Filing accounts for a dormant company
What is a dormant company?
The main definition of a dormant company is one that doesn’t trade, and has no other additional form of income. In that respect, a company isn’t dormant if it is:
- Earning interest
- Managing investments
- Buying and/or selling goods with the intent to make a profit
- Receiving any other form of income
To complicate things slightly though, HMRC and Companies House have different definitions of what it means to be a ‘dormant company’.
What Companies House call a dormant company
Companies House defines a company as being dormant if no significant transactions take place during the accounting period. A ‘significant transaction’ is one which the company would normally record in the accounts, but doesn’t include:
- Filing fees paid to Companies House
- Penalties for late submission of accounts
- Payment for shares when the company was incorporated
It’s important to note that a dormant company is not the same as a dissolved company on Companies House. If you wish to close down the company entirely, this is a separate process.
What HMRC call a dormant company
HMRC’s definition of a dormant company is a bit different, describing it as a company which isn’t active or liable for Corporation Tax. It can be:
- A brand-new company which has yet to start trading
- An ‘off-the-shelf’ company being held by a company formation agent, preparing for it to be sold on
- An active company that has traded previously but is no longer currently trading
- A company that will never trade because it has been incorporated with the sole function of holding an asset (e.g., property)
Are you allowed to make a company dormant before it starts trading?
Yes, you are allowed to register a new company and then make it dormant before you’re ready to start trading. You can also make an active company dormant with no fees incurred. The company must meet the criteria outlined above for it to successfully qualify as legally dormant.
Do I need to submit Company Tax Returns for a dormant company?
As long as you tell HMRC that your company is dormant, you won’t need to submit a Company Tax Return or pay Corporation Tax for it. So, if you incorporate (register) your company but you’re not quite ready to start trading and filing accounts yet, making the company dormant is a bit like pressing the pause button.
Should I make my company dormant before it starts trading?
Whether your company has previously traded or it’s a new business that hasn’t started trading yet, there are a number of reasons why you might wish to make it dormant. We explore some of the most common motivations below.
To protect a brand name, company name or trademark
Have you come up with a strong idea for a product or service, or a great brand or business name? Business owners might find the idea of ‘securing’ the company until they’re ready to start trading to be appealing. Registering the company protects the names or trademarks whilst you set up the rest of the business.
To press pause during a company restructure
Generally, this reason applies more to existing companies that have previously been active. For a business undergoing some form of restructure, it can be extremely beneficial to become dormant in the meantime.
For instance, if operations will pause during the process, dormancy means you won’t need to submit Company Tax Returns for the period it ceases to trade.
Can a dormant company hold assets?
Yes, it can! In fact, some limited companies are setup as dormant for the sole reason of holding an asset. If you’re holding assets or Intellectual Property (IP), making the company dormant before it starts trading is a great way to move things along in the background while protecting what you own. This also applies if the company doesn’t start trading at all.
In the event of extreme unforeseen business circumstances
If a business owner dies suddenly, for example, and there is no succession plan or contingency strategy in place to continue trading, making the company dormant for a period of time might be the best course of action to take.
Do you need to file accounts for a dormant company?
If you aren’t clear on the rules and regulations things can get a little complicated when it comes to accounting for a dormant company, so let us break it down for you.
- No, you do not need to file accounts for a dormant company to HMRC.
- You are also not required to submit a Company Tax Return or pay Corporation Tax to HMRC if your company is currently dormant – unless, of course, you receive a request to do so.
- However, even if your company is currently dormant, you will still need to submit a confirmation statement and annual accounts to Companies House.
This is because all companies must submit these to Companies Houses – even if the company isn’t trading. If you fail to do so, you could find yourself facing a hefty penalty.
As with most things to do with business finances, understanding the ins and outs of dormant companies and their respective obligations can be confusing.
That’s why we always recommend seeking the guidance and expertise of an accountant. That way, you can be sure that you’re doing everything by the book, and in the most tax-efficient way possible!