Overview: Dormant Company
When a firm has no active operations and no other revenue streams, such as investment income, we might classify it as being inactive.
A business may go out of business for a number of reasons. A business may go into dormancy as soon as it is founded or it may become inactive after already existing.
However, depending on your perspective, the word “dormant” could signify something quite different. For instance, a company might be dormant to save on taxes but not necessarily meet the tighter definition used by Companies House.
Are you thinking of obtaining the dormant status for your company, but don’t know where to start? Don’t worry. We are here to help you with it.
In this article, we will be going in to help understand what is a dormant company, how can you make a company dormant, the advantages and limitations of making a company dormant, how to re-activate a dormant company, and many more topics related to a dormant company. Keep reading!
Meaning Of A Dormant Company
A firm gets dormant status when it stops operating and doesn’t make any kind of revenue. But this doesn’t make it lose its registration at the Companies House. If your company receives the dormant status, you will have to issue an annual account and also a confirmation notice.
You may wonder why would a functioning company wish to go dormant? Well, here are a few reasons why:
- If the founder of the firm wishes to take a long leave
- To reserve a firm name before starting a business
- To restructure a functioning business
- If the company acts as a holding company for an intellectual property
How To Make A Company Dormant?
There are several ways through which different types of companies can become dormant. Let’s learn more about them:
New company
If you wish to obtain the dormant status for a new firm, the process is easy and uncomplicated. You will first have to issue your firm with the Companies House and then fully establish your company. Once that is done, inform HMRC about your wish of obtaining a dormant status for your firm. This can be done via post or phone.
Previously active companies
To make an already functioning company dormant, ensure that all the bills are paid, and the contracts are eliminated. You will have to make sure that all kinds of agreements with clients are canceled and whatever amount that’s owed or due is reconciled.
Another point to ensure is that VAT and outstanding taxes are submitted. Lastly, check that final wages are paid, the process that’s implemented for redundancy or dismissal of workers is correct. The firm’s bank accounts should also be terminated.
Then the HMRC is informed that the firm is dormant and doesn’t have to pay any kind of tax. If your firm never got any notification to send a Company Tax Return digitally, you can still complete the requirement by post or phone. If you have issued a CTR or gotten a declaration to send the CTR, you’ll have to issue it digitally. This will help HMRC in knowing that your firm is now dormant.
Filing And Tax Requirements For Dormant Company
As your firm becomes dormant and you inform the HMRC, you do not require to submit the company tax or issue any other CTR until you get a notice to do so. So, when your firm is inactive, the confirmation letter and yearly accounts should remain issued with Companies House each year. The inactive firms that are also identified as small, can give dormant accounts in place of annual accounts.
Such small dormant firms do not need to attach a report from the auditor with their dormant accounts. As per the rules of the Companies House, to stay dormant, the company should not have made any significant transactions in the last fiscal year. Some exceptions are:
- Fees for Companies House filing
- In case of late filings, the penalties paid are an exception
- Payment done for shares at the time of company establishment
Pre-Requisites For Obtaining The Status Of Dormant Company
There are certain requirements for a company to get the dormancy status. Let’s know what are those:
- Refrain from processing any business operation
- Zero outstanding loan
- No remaining payment or public deposit
- No dues of the workmen
- Zero legal dues
- Devoid of any legal proceedings
- No inquiry ordered against the firm
Compliances Of Dormant Company
An inactive firm should match the requirement of the mandatorily needed directors, issue official documents, and keep paying the mentioned yearly fee to the Registrar of Companies to maintain its inactive status in the Companies House Register.
There are certain compliances that a dormant firm should follow:
- The returns of an inactive firm should be issued annually, indicating the firm’s economical position.
- An inactive firm must have a defined number of board directors. This means when talking about a public company, there should be at least 3 directors, for a private company, 2, and just one when needed for an OPC.
- The filings are performed in MSC-3(1) form, in one month, starting from the end of every fiscal year.
- These returns are to be exclusively audited by the recruited chartered accountants.
- Every 6 months, a minimum of one board meeting must be held.
- The firm’s name would be removed if these compliances aren’t duly followed.
- Before the firm starts to lose its dormancy status, it should issue an application to change its status from dormant to active.
- If the above-mentioned compliances are not met, the company name shall be struck off by the ROC.
How To Reactivate A Dormant Company?
The HMRC should be informed when you decide that your inactive firm should come back into operation. This will help your firm lose its inactive status immediately, and then be determined as active to fulfill the payment of company tax.
The process of starting reactivation of a Dormant Company requires you to:
- On the official website, put in your firm’s official gateway user ID number and password. You can create a new user ID while logging in if you already don’t have one.
- In the next step, gather your legal accounts and CTRs by your firm’s year-end.
- By issuing for company tax again, you can tell HMRC that you have decided to restart your firm’s operations.
- After your firm’s year-end, in 9 months, send annual accounts to Companies House.
- Any remaining corporation tax should be paid in 9 months of your firm’s year-end.
- Issue a CTR and this comprises complete statutory accounts. This will be sent to the HMRC within 1 year of your firm’s year-end.
Advantages Of Dormant Company
It is preferable to relaunch than to commence from the beginning, and only Dormant Businesses have this advantage. If anybody wishes to pause for some time to relaunch the firm later, they must obtain a dormant designation.
A Dormant Company may not be functioning or operative, but it is still a legal entity in the eyes of the government. Let’s learn what are the benefits of attaining the status of a dormant company:
- Preserving the name of the firm
The intellectual assets possessed by the inactive firm incorporate the trademark of the firm name. The company’s name is preserved, which in return saves others from trading under the name of the inactive firm.
- Upcoming project
A firm is prepared for all future projects when it’s in a dormant state. This way, the founder can also keep the trademark of the firm name, and also plan for further trading.
- Holds assets
A dormant firm is a great way to keep fixed assets and also intellectual properties. Another reason why a dormant company is useful is that it is easy to re-activate and regain the active designation.
- Less compliance
There are fewer compliances when it comes to forming a dormant company when compared to the process of dissolving or closing a firm.
- No need to pay taxes
A company once dormant, doesn’t need to pay any tax until it regains its active status back. A dormant company also doesn’t have to pay the incorporation price again.
Limitations Of Dormant Company
Even though there are some advantages of owning a dormant corporation, there are also some disadvantages.
For instance, the chairman of an inactive firm is still required to do management operations such as submitting dormant statements and sending a yearly Confirmation Letter to the Companies House. As a result, even if your organization is not in business, these operations still have to be performed.
The following are the downsides of a defunct or inactive firm:
- Company directors might have to pay fines if they fail to file in time.
- Need for yearly tax and reviews on accounting
- Interruption of administration time
- Payment of unimportant compliance charges
Can A Company Make Or Receive Payments When Dormant?
An inactive firm has attained an inactive status and can’t process any type of account payments. To put it in simple terms, it’s a firm that can’t trade, is devoid of any type of revenue, and can’t make payments. But, even if the firm is inactive, it is still issued with the Companies House.
Difference Between Dormant And Non-Trading Companies
The inactive firms, as per their definition, are non-trading. But a point here to be noted is, all non-trading firms aren’t always inactive. Firms that have ceased functioning can remain involved in transactions done before trading. Such firms won’t be tagged as dormant even if they aren’t trading at all.
Conclusion
So, if you are someone who has decided to attain dormancy status for your company, you now know what steps to follow, and what to keep in mind. Yet we will suggest you get assistance from a professional expert in this domain.
OnDemand International can help you in getting dormant company status, just get in touch with our experts.
FAQ’s
No, if you have told HMRC about terminating your firm’s operation for some time, you won’t have to submit the company tax or issue CTR.
No, since dormant firms do not take proceed with any financial transactions, they do not require any bank account.
Dormant companies are allowed to accept payments for shares by those subscribed to them. They may also pay any fees to the Registrar of Companies or penalties to any local or federal authority.
Yes, there are. You get stuck with needless expenses on compliance, filing of reports and returns. Directors, in particular, are personally liable for tax or reporting failures. You might need to get your reports audited by a third party in some cases.
Similarly, dormant companies can act as holding companies for illegal assets. They can also be used to transfer money indirectly to the personal accounts of ultimate beneficiaries as parent companies of failing subsidiaries or child companies in other jurisdictions.
In the past dormant shell companies in the US have been used to sell penny stocks at low prices. Scamsters then spread rumors in the market that led to a surge in the price of the penny stock. Later these scamsters sold all their shares, departing with a personal profit.
Similarly, dormant companies can act as holding companies for illegal assets. They can also be used to transfer money indirectly to the personal accounts of ultimate beneficiaries as parent companies of failing subsidiaries or child companies in other jurisdictions.
Taxes are not paid until dormant company start operating. However, if a firm had previously conducted business, it is required to pay HMRC any unpaid taxes from that time period.
Yes, a dormant company may own stock in another private business. According to the 2013 Companies Act, this is permitted. There are several considerations to make, though:
- The dormant company must adhere to the definition of a dormant company, which calls for the absence of any material accounting transactions during the reporting period.
A subsidiary of the other private company cannot be the dormant corporation. - A shell company, which is a business formed with the goal of carrying out fraudulent or unlawful activity, is not permitted to be a dormant company.
