Dormant companies don’t file tax returns and are not required to pay corporation tax. In this blog, we will explain the meaning of a dormant company, why there are no dormant company tax returns, and the practical steps of making a company dormant.
What is a dormant company and why is no tax return needed?
In general, a company that is not carrying out any business activity or receiving an income is referred to as a dormant company.
HM Revenue and Customs (HMRC) has its own specific definition of a dormant company:
- A company that has stopped trading and has no other income, such as investments;
- A new limited company that hasn’t started trading yet;
- An unincorporated club or association run for the benefit of its members, and owes less than £100 Corporation Tax; or
- A flat management company.
This HMRC definition is important, as it determines whether a company is dormant the for purposes of corporation tax. A company does not need to file a tax return if it is classed as dormant by HMRC. Most companies that are considered dormant by HMRC will not have received any income, and this is why dormant company tax returns are not required.
It’s important to note that the registrar of companies, Companies House, has a slightly different definition of a dormant company.
A company will be considered dormant by Companies House if it has had no significant accounting transactions during its most recent financial year. This means that it must not have generated income or earned bank interest during this financial year.
Can I make my company dormant to avoid filing a tax return?
Although dormant company tax returns are not required, there is no point in making a company dormant solely for this purpose. By definition, dormant companies are not trading, so will generally be very limited in their usefulness as business vehicles. A company will not be considered as dormant by HMRC if it:
- carries on a business activity such as a trade or professional activity;
- buys and sells goods with a view to making a profit or surplus;
- provides services;
- earns interest;
- manages investments;
- receives any other income.
Some of the scenarios in which a company will be dormant and does not need to file a tax return include:
- a new company which has recently been formed but has not yet started trading;
- an off-the-shelf or shell company which is being held by a company formation agent intending to sell it on;
- a company which has been formed with the sole purpose of owning an asset such as land or intellectual property, and which will therefore never actively trade;
- an existing company that has traded in the past but has ceased trading temporarily; or
- an existing company that is no longer trading and intends to be dissolved and struck off from the register of companies.
How do I make a company dormant to avoid filing a tax return?
If a company fulfils the criteria of a dormant company, HMRC can be informed that it is dormant. This can be done by phone or post with the 10-digit Unique Tax Reference (UTR) number.
Once HMRC has been informed that a company is dormant, there will be no need to file a further corporation tax return – unless you receive a Notice to Deliver a Company Tax Return.
If HMRC believes that a company is dormant, it will inform the company that it considers it to be dormant for the purposes of corporation tax, and it will state that there is no need for a dormant company to submit a tax return.
If I restart a company that has been dormant, do I need to file a tax return?
If a dormant company starts trading again, it must inform HMRC that it is no longer dormant. The company directors should make HMRC aware that a company is active again within three months from the date on which it starts to trade again or receives an income.
Once a dormant company becomes active again, it will need to submit its annual tax return. As usual, the corporation tax return should be submitted within 12 months from the end of the company’s accounting period. Any corporation tax due needs to be paid within 9 months and 1 day from the end of a company’s accounting period.
It should be noted that the corporation tax accounting period will usually change when a dormant company is made active. This accounting period begins again when the company resumes trading.
But the accounting reference date for the purposes of filings with Companies House stays the same, since some Companies House filings continue while the company is dormant. This means there will be a difference between the two deadlines if a dormant company becomes active.
However, it is possible to align the Companies House accounting reference date with the end of the corporation tax accounting period by following the steps in this example:
- Your non-trading or dormant company’s accounting reference date is 30 September. You start business activities again on 1 June.
- Make a set of statutory accounts for the usual period, from 1 October to 30 September.
- Send your accounts to Companies House, and your Company Tax Return for the period 1 June to 30 September to HMRC.
- After this, you will need to complete company accounts and a Company Tax Return from 1 October to 30 September each year.
So, dormant companies don’t need to file tax returns. Do they need to file anything?
Dormant companies do not need to file tax returns or anything else with HMRC.
But they are still obliged to file the annual confirmation statement and annual statutory accounts with Companies House. However, full annual accounts are not required – instead, a simplified version of accounts, known as dormant company accounts, are acceptable.
In general, a dormant company maintains a relationship with Companies House while it is dormant, but effectively puts its relationship with HMRC on pause until it restarts trading.
Quality Company Formations provides a dormant account filing service for limited companies, regardless of whether the company was incorporated using our website, for £39.99 +VAT.