A Guide To Using Dormant Companies

There may come a time when you decide you want to register a company, but do not wish to begin trading yet.

This is what’s known as a dormant company and there are various reasons why you may wish to set one up.

First let’s establish…..

What’s a Dormant Company?

The first thing to ask is what exactly is a dormant company? In short, it’s simply a business registered with Companies House that is not currently trading.

This means that the organisation cannot be engaged in business and must not be carrying out any significant transactions in or out of the business.

It will still remain registered as a limited company and no new businesses will be able to be formed using the same name.

In this respect, dormant companies are very much the same as active ones. But, they should not be confused with dissolved businesses, which are ones that have ceased trading with no intention to recommence activity.

Can a Dormant Company Still Trade?

Put simply, no, a dormant company cannot still trade. By definition, they are a business is that is not actively engaged in any activity. 

By receiving any income or buying and selling any goods, a dormant company would no longer be considered ‘dormant’ and would need to become ‘active’ and start paying corporation tax.

Can a Dormant Company Pay Salary or Dividends?

No, if an organisation is declared as ‘dormant’ it cannot pay salary or dividends or employ any staff. 

To be more precise, it cannot do any of these things without no longer being considered dormant.

Therefore, it is possible to pay salary and dividends from a dormant company, but doing so will mean the business is now active and needs to be treated as such.

Can a Dormant Company Hold Assets?

Since a dormant company is simply one that is considered to have no significant transactions, it is technically possible for it to hold an asset.

However, there can be no significant income or expenditure generated by the assets. Otherwise, the business will be considered to have become ‘active’.

Can a Dormant Company have a Bank Account?

Yes, it is possible for a dormant company to have a bank account, providing no significant interest is earned and no significant fees are being paid to keep the bank account open.

That said, since it should not have significant transactions, the question would be why a bank account would be necessary. Most dormant companies will not have a bank account for this reason.

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Why Register a Dormant Company?

There are two main reasons why someone may wish to register a dormant company:

To Reserve a Company Name for Future Use

Many businesses like to register dormant companies in names they may wish to use in the future. For instance, a new brand may be currently trading under the name of the larger business but, at some point may be successful enough to justify becoming a stand-alone company.

By registering a dormant company you are ensuring you can use that name in the future as soon as you are ready.

This should not be confused with trademark protection. All that registering the name will do is prevent anyone else from registering a business with the same, or a very similar, name.

This means it cannot be used to stop others from passing off as your brand.

To Temporarily ‘Pause’ a Company

 If you are actively trading but need to pause activity for a period of time, dormancy is often the best route forward.

This will allow you to keep your name and the reputation/brand recognition you have built up over time. 

When you are ready to begin trading again, everything is already setup and so you can recommence activities much quicker and easier than starting from scratch.

How long can a Company Stay Dormant?

Remaining as a dormant company

There are no time-limits imposed on how long a business can stay dormant.

Providing that the business has no significant transactions and fulfils all the other criteria, it can remain in a dormant state indefinitely.

This means it’s possible to create a dormant company years ahead of actually becoming active.

What are the Requirements for Dormant Companies?

Naturally, as they are not actively trading, there are few documents that need to be produced each year to maintain a dormant company. However, this does not mean that they do not require any maintenance.

Whilst full annual accounts do not need to be prepared, you will still need to submit an abbreviated balance sheet and notes each year.

These must be submitted by the same deadlines that full trading companies must comply with.

Dormant companies must also still submit annual returns and still notify Companies House to any changes in directorships or shareholders.

Full details on the requirements can be found on the Companies House website. Because of these requirements, you should only look to form a dormant business if you really need to – it is not something to do just for the sake of it.  

Exceptions to the Rules for Dormant Companies

While the vast majority of dormant companies will need to abide by the rules above, there are a couple of exceptions.

One is that unincorporated clubs and associations that owe less than £100 in corporation tax can be declared as ‘dormant’ and continue to trade, providing they do not exceed any of the limits set by HMRC.

Flat management companies can also sometimes be registered as dormant while still being ‘active’. Such organisations are often used by groups of residents who need to manage communal grounds, for example.

In both cases, the business will need to follow certain rules and limits to qualify for the exception. Details of these can be found on the HMRC website.

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Changing an Active Company to a Dormant Company

If you have an active company that is becoming dormant, there are a number of things you’ll need to do.

Firstly, ensure that you meet all the criteria to ensure it isn’t considered active.

Then, notify HMRC that your business is now considered dormant for the purposes of corporation tax.

Following this, you’ll need to ensure you deregister for VAT and close your PAYE scheme if applicable to your business.

Restarting a Dormant Company

If, in the future, you want to turn a dormant company into an active one, there are four main things you need to do:

  1. Inform HMRC that your business has started trading again
  2. Send annual accounts to Companies House no later than 9 months after your year-end
  3. Ensure you pay any corporation tax your business owes
  4. Send a tax return to HMRC following your year-end

Of course, if you are required to register for VAT or PAYE you will also need to do that too. Don’t forget, you’ll also need a bank account for the business too.