Unlike active companies, dormant limited companies do not trade at all.
Although most businesses registered with Companies House process income and expenditure, dormant companies are just standard limited companies that are inactive.
Some basic rules about dormant companies
- Although registered and incorporated, dormant companies are not permitted to conduct any trading activity.
- This includes buying or selling goods, buying property or business assets, and managing company investments.
- In addition, dormant companies cannot pay directors a salary or employ staff.
- As the reporting requirements for dormant companies are different, it is vital that directors are aware of the distinctions between active and dormant businesses.
- While a company may not be trading, it will still be considered active if it keeps staff on its payroll or continues to market its activities.
- To meet the requirements of a dormant company, a business cannot undertake any type of trading activity and cannot receive any income.
Why would you own a dormant company?
While dormant businesses cannot trade and cannot, therefore, make a profit, there are advantages to registering a dormant company with Companies House.
This will normally arise in one of two ways:
- a company will be dormant from the moment it is incorporated or
- an active company may become dormant.
Protecting a name for the future
In the first instance, an individual may choose to register a dormant company so that they can begin trading at some time in the future.
Being proactive and incorporating the enterprise ensures that no one else can register a company with the same name, which can be attractive to future company directors.
Protection for sole traders
In addition, existing sole traders may want to create a dormant company to protect their name and reputation.
Although a sole trader may have operated under a specific business name for some time, if it is not protected or registered with Companies House, someone else could launch a limited company under the same name.
However, by creating a dormant limited company, the sole trader can prevent anyone from doing this and still continue to trade in the way they feel is most appropriate for them.
Temporarily cease trading
When existing companies cease trading permanently, they are usually wound up.
While this is standard procedure if the business is closing, directors may want to temporarily cease trading in some cases.
By changing the company’s status from active to dormant, directors benefit from fewer reporting requirements and lower costs but are still able to ‘re-activate’ the company at any time.
This can be particularly advantageous for smaller limited companies.
Small companies often employ a small number of staff, and external circumstances may prevent them from trading.
Rather than permanently closing the business, they can modify the status to dormant and retain the option to trade in the future.
How do you make an existing company dormant?
If you want to change a company’s status from active to dormant, you’ll need to contact HMRC.
You, or your accountant, can do this online. Make sure you have the following information to hand:
- Your company’s UTR number.
- The date the company ceased trading (if it ever started).
You can also tell HMRC via phone or post, although online is preferred.
If your company has previously traded, you must prepare a company tax return and pay any outstanding Corporation Tax on profits it made before going dormant.
After you’ve been in touch with HMRC, you shouldn’t need to file another company tax return unless you start trading again or if HMRC asks you to.
Are there reporting requirements for a dormant company?
Unlike active companies, dormant companies are subject to a few reporting requirements.
You must file the following documents with Companies House each year:
- A confirmation statement
- Dormant annual accounts
Both documents can be filed quickly and easily online via WebFiling. Find out more here.
How do you make a dormant company active?
- If you decide to make a dormant company active for the first time or re-activate a previously trading company, you must inform HMRC within three months.
- If your company has never actively traded, you must register for Corporation Tax online.
- If your company has previously traded, you can log in to your HMRC tax account and switch your Corporation Tax status to ‘active’ again.
- You don’t need to inform Companies House if you make a dormant company active.
In summary
Whether companies are newly incorporated or have been trading for a significant period, modifying their status to dormant can have numerous benefits.
If the company cannot trade at present, notifying HMRC that it is dormant can help lessen the director’s administrative burden.
It can also reduce the associated costs while enabling the company’s directors to restart (or start) trading at a later date.
Tax-efficient protection for directors
- Life Insurance - pay via your limited company - save up to 50%
- Income Protection - tax deductible via your ltd company
- Professional Indemnity insurance - from £13.50/month via Qdos