Find Out What It Means Using Dormant Companies

Dormant companies are companies that are not actively trading, but are still registered with Companies House. 

There are several reasons why you may want to have a dormant company set up, including for future planning and brand protection. In this guide, we’ll go through the ins and outs of dormant companies, including your requirements and responsibilities, filing dormant accounts, and how to restart your business when its time. 

Now, let’s not sit around dormant for much longer – let’s jump straight in. 

The Uses For a Dormant Company 

Dormant firms are businesses that are registered with Companies House and are not currently trading. It will still remain registered as a limited company and no new businesses can be formed using the same name.

Because of that, the main uses for dormant businesses are: 

To Reserve a Company Name for Future Use

Many businesses like to register dormant enterprises 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 can’t 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.

To Hold Assets Or Investments

Dormant firms can still hold assets and investments, such as real estate, intellectual property, shares, or bonds. And as the company isn’t currently active, it isn’t held to the same tax implications of an active company – which can make it a sound place to store these assets. 

However, there can be no significant income or expenditure generated by the assets. Otherwise, the business will be considered to have become ‘active’. For more advice about assets and investments, we’d recommend speaking to an accountant for advice.

The Limitations of Dormant Companies

By definition, dormant businesses are a business is that is not actively engaged in any activity. So, for a company to remain dormant, it needs to stay inactive. This means: 

• No trading. 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.
• Not paying salary or dividends. If an organisation is declared as ‘dormant’ it cannot pay salary or dividends or employ any staff. To receive any salary and dividends from a dormant company, would mean the business is now active and needs to be treated as such.
• Not have any sifigicant transactions. Companies that are dormant are allowed to keep existing bank accounts, 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 businesses will not have a bank account for this reason.

In short, the biggest limitation of dormant firms is that they must remain dormant. Any activity will mean the business is active, so the company must be left completely alone.

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The Requirements of Dormant Businesses 

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 doesn’t mean that they don’t require any maintenance.

If you haven’t already received a letter from the HMRC telling you that they’ve decided to treat your company as dormant, then you will need to inform them of the change and that you’re not liable for Corporation Tax. 

Dormant enterprises must also still submit annual accounts and confirmation statements to Companies House. If there are any changes in directorships or shareholders, you must also make sure that you inform Companies House of the change. 

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 isn’t something to do just for the sake of it.  

Submitting Your Annual Accounts as A Dormant Company 

Even if you’re not trading, there’s still no escaping annual accounts. 

Whilst full annual accounts do not need to be prepared, you will still need to submit an abbreviated balance sheet and notes each year. For the balance sheet, you don’t have to include a breakdown of any fixed assets, creditors, and debtors – which make them much easier to complete. 

For dormant businesses, submitting your accounts is basically a way to show that your company is not actively trading (as you should have no significant activity on your accounts!). For more information on what abbreviated accounts look like, take a look at our guide here. 

In addition, you also need to submit annual confirmation statement to Companies House, which will ensure that your registered details are still correct.

This includes information such as the Name and registered number of the company, your registered office address, names and details of your directors and shareholders, and more. This statement is due every year on the anniversary of your incorporation date.

For instance, if you incorporated the company on May 14th 2023, your Company statement will be due May 14th 2024 (and 2025, 2026, and so on).   

Failure to submit these accounts will still suffer the same fees and consequences as other live, trading companies. So, make sure that you get them submitted correctly and on time.

Exceptions to the Rules for Dormant Companies

While the vast majority of dormant firms 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.

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.

Dormant vs Dissolved Businesses 

Dormant companies should not be confused with dissolved businesses, which are ones that have ceased trading with no intention to recommence activity.

An easy way to explain the difference is through cars. A dormant car will be a car that’s currently off road. It’s sat in a garage, idle, but can be put back on the road and used again if the need changes. 

However, a dissolved business is a car that’s been fully scrapped. There’s no putting that car back together again – just like there’s no way a dissolved business can come back to life. The only answer is move onto a another car (or create a new 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.

For more business help and advice, we’re here for you at Business4Beginners.