What Is A Dormant Company?

Overview Of What Is A Dormant Company

A dormant company is one that does not trade and has no sources of income. 

All companies have legal responsibilities such as filing accounts and tax returns. However, when a company is dormant those responsibilities are less onerous. 

Technically a company with expenses will be deemed to be trading, particularly if it is incurring such expenses with a view to developing the supply of goods and services for sale in the future.

HMRC Responsibilities

Although a company that makes no sales for a material period of time will not have any corporation tax to pay nevertheless the incurring of expenses will create a tax loss and this should be recorded on a tax return. 

A company that has ceased trading and is without a source of income can often be relieved of the need to file a corporation tax return with HMRC.

Companies House Responsibilities

However, a dormant company still has to file dormant accounts and confirmation statements at Companies House but they will be simpler in comparison with a trading company.

A dormant company for the purposes of Section 1169 of the Companies Act 2006 is one when there are no significant accounting transactions that would need to be recorded in the company’s books and records. Furthermore, the following transactions are excluded from consideration:

• filing fees paid to Companies House
• penalties for late filing of accounts
• money paid for shares when the company was incorporated

A dormant company although inactive, still remains on the Companies House register.

How Do You Create A Dormant Company?

A newly incorporated company will initially be dormant until it starts trading.

Once a company has just been incorporated you can notify HMRC to record the company as dormant. If you start trading at a later date you need to get back in touch with HMRC to advise of the change of status. HMRC will then expect you to submit corporation tax returns and accounts.

If however, a company has been trading then to become a dormant company requires the Directors to do all things required to cease trading. The starting point is to stop providing goods and services to customers as this will in turn not only stop sales but also reduce the expenses required to develop them. There are also administrative matters that need to be addressed such as paying off all creditors, making employees redundant, closing the bank account(s), closing the company’s PAYE scheme and deregistering for VAT. Once those steps are complete you will be able to make the company dormant. A more detailed guide can be found in our article how to stop trading a Limited company.

Why Create A Dormant Company?

A Limited liability company is a separate legal person in law. Although a company needs the Directors to run it there are administrative requirements each year that can be time consuming that a company’s owners may wish to be relieved of.

The following might be reasons for making a company dormant:

• The Directors wish to retire or take time out from running a company.
• Illness may force a Director to take steps to stop running a company.
• If a trading business is unsuccessful then ceasing trading can be an important step to stop it from losing money.
• Instead of dissolving a company if it is made dormant it can later be used if a Director wants to start a new venture and its name is retained.
• It can be an inexpensive way to have access to a company should the need arise later.
• It might be a simpler and cheaper process than closing down the company.

How To Make Your Dormant Company Active

If a Director wishes to make their dormant company active again then this is easily done by notifying HMRC of the chance of status so that it is registered again for corporation tax. It is important this is not overlooked to ensure the company does not forget to pay corporation tax and file the necessary tax returns. Failure to file and pay tax can lead to HMRC tax penalties due to a careless error.

Closing Down A Limited Company

If a Director simply wishes to permanently cease trading and be struck off at Companies House Register, instead of having to deal with the annual administration it might make more sense to close the company.

The procedure to deploy depends on the financial position of the company because an insolvent company will typically require a different procedure than a financially solvent one.

If you have reached this decision, the first thing you will need to establish is whether the company is solvent or insolvent, as this will determine the right way to close the limited company.

Two Ways To Close A Solvent Company

There are two ways to close down a solvent company:

• Voluntary Strike Off
• Members Voluntary Liquidation

Voluntary Strike Off

Using form DS01 to strike off a company will enable the Directors of a company to produce what is called a Voluntary Strike Off arising from Section 1003 of the Companies Act 2006. After a period of around 3 months, the company will be struck off the register at Companies House and cease to in effect exist.

However, in order to qualify for the Voluntary Strike Off procedure Section 1004 of the Companies Act 2006 the following must not have arisen in the previous three months, the company has—

1. changed its name,
2. traded or otherwise carried on business,
3. made a disposal for value of property or rights that, immediately before ceasing to trade or otherwise carry on business, it held for the purpose of disposal for gain in the normal course of trading or otherwise carrying on business, or
4. engaged in any other activity, except one which is—

It also must not be:

• Insolvent
• In Administration
• Being wound up or at risk of going into Liquidation
• Had a Company Voluntary Arrangement proposed

Members Voluntary Liquidation

Alternatively, a solvent company can be closed via the Members’ Voluntary Liquidation (“MVL”) procedure.

This can be an attractive tax effective way to close a company as the assets distributed to a company’s shareholders are taxed personally as Capital Gains Tax (“CGT”) which can be much more attractive than assets being taken out before Voluntary Strike Off and the recipient instead charged at materially higher Income Tax rates. The CGT may result in a tax charge potentially as low as 10% if the shareholder qualifies for Business Asset Disposal Relief (formerly known as Entrepreneurs Relief).

Two Ways To Close An Insolvent Company

There are typically two ways to close down an insolvent company:

• Creditors Voluntary Liquidation
• Compulsory Liquidation

Creditors Voluntary Liquidation

A useful option for Directors to close a company is Creditors Voluntary Liquidation.

This enables the Directors to initiate the orderly winding up of a company and appoint an Insolvency Practitioner to be the Liquidator.

This is a procedure that enables the Directors to demonstrate acting responsibly in taking control and in effect jump instead of being pushed by being forced into Compulsory Liquidation when a creditor obtains a Winding Up Order.

Compulsory Liquidation

A company can be closed down by being placed into Compulsory Liquidation. It is similar to Credtiors Voluntary Liquidation in that a Liquidator is appointed to realise the assets, wind up the company’s affairs and make a distribution to creditors if net of costs there are sufficient funds available.

There are two ways to close a company down through the Compulsory Liquidation procedure.

It is possible for Directors to simply sit back and wait for creditors to issue a Winding Up Petition to the Court for the company to be then wound up. Upon the making of the Winding Up Order, the Official Receiver is the Liquidator in the first instance who will look to conduct the process and investigate the conduct of the Directors.

Alternatively, it is also possible for the Directors if they wish to petition the Court for a company to be placed into Compulsory Liquidation. 

Compulsory Liquidation however removes all control directors have over the company as it is being placed into Liquidation. In a Compulsory Liquidation, Section 127 of the Insolvency Act 1986 prohibits any disposition of company property without court approval. This provision does not apply in the case of Creditors Voluntary Liquidation leaving the Directors with some residual control over the assets of the company up to the date of Liquidation itself.