What Is A Dormant Company And Should You Make Your Company Dormant?
April 20, 2021
Whether you’re a contractor running your own operation, or an owner of a bigger business, there are many reasons why you might take a step back from the duties that directorship of a limited company entails.
However, shutting down a business in its entirety may seem a drastic step, so a preferable option may be to make your company dormant instead.
In this article we discuss what dormant companies are, how to make your company dormant, the disadvantages of a dormant company and more.
What is a dormant company?
As the name suggests, a dormant company still exists but without any “significant accounting transactions” taking place.
As per the government, significant transactions do not include the following:
- Filing fees paid to Companies House
- Penalties for late filing of accounts
- Money paid for shares when the company was incorporated
Essentially, the business remains on the Register of Companies at Companies House but does not carry out any business activities.
To register your company as dormant, you must engage with HMRC who will request that you complete a corporation tax return and have your business deregister for VAT.
You can find more information on this via HMRC’s website.
Note, once your company is registered as dormant, any trading activities will immediately invalidate dormancy status.
Why might you make your company dormant?
Maybe you have had the lightbulb moment and the wheels are in motion – or perhaps not?
If your idea isn’t ready to go straight to business, registering your company as dormant can be a protective option, from a brand standpoint.
By registering your company, you secure your brand and trademark, preventing others from using them.
For more established companies, dormancy can offer a low-cost alternative to shutting up shop for good.
Some contractors who intend to move back into full-time employment or are seeking to step back for personal reasons find dormancy a suitable option since:
- It allows time to plan and initiate any necessary restructuring
- It is not a time-limited process
- It is cost-effective – particularly when compared to closing down a company permanently
Notably, the level of administration in maintaining a dormant company is minimal-to-none.
Companies House must simply be informed of the intended and continued dormancy. You can do this via an annual confirmation statement informing Companies House of your address details and directors.
You will also need to inform them, in due course, when you plan to begin trading again. Annual submission of company accounts will demonstrate no trading has taken place, using your last business bank account or any others, in the meantime.
Regarding this, if you are ready to begin trading (or trading again), you’ll need to register to pay corporation tax with HMRC, share annual accounts with Companies House and complete a company tax return within 12 months of the business-year end.
Are there disadvantages of dormant company status?
Dormancy isn’t usually a risky strategy for the majority of companies. It is, however, worth assessing your finances before proceeding in this fashion.
Taking on some tax advice is likely prudent too, particularly if you are intending to extract funds from the company on registering it as dormant.
In some cases, should dormancy continue over multiple years, it may eventually prove more cost-effective to close the company completely.
Of course, this may not be evident when the initial decision to register as dormant takes place.
Summary: What is a dormant company and should you make your company dormant?
Under this arrangement, a company still exists but with dormant accounts. For corporation tax purposes you’ll need to file a return and deregister for VAT.
You will also need to inform Companies House when you plan to begin trading again, whether using old business bank accounts or new ones. Annual submission of dormant company accounts will confirm no trading has taken place.
As we’ve said, there are a range of scenarios in which dormancy may be both appealing and advantageous for company owners.
However, when your company is dormant, this status isn’t entirely without potential pitfalls. A company’s dormant status, as with any major business decision, is almost always worth seeking expert advice on.
At Hudson Weir our team assists business owners in making such choices on a day-to-day basis; we have a wealth of experience in business wind-up procedures – including temporary cessation of trading i.e. dormancy.
If you’re considering whether dormancy might be a viable or sensible option for your business, why not get in touch for a no obligation discussion, and allow us to work through the pros and cons of such a step with you.
