Sometimes our clients stop using their limited company for extended periods of time. This article covers what needs to be done to make the company dormant.
Why make the company dormant
A dormant company has significantly reduced reporting obligations with Companies House and the HMRC. This reduces the administrative burden, and often clients can take care of the filing obligations themselves to help reduce their accounting fees each year.
We also have some clients who register their own company through Companies House and who may not start using the company for several years. Sometimes this is done to secure the company name and preparation for a future business operation. In this case also, the company can be deemed dormant with significantly reduced reporting obligations.
Making a newly formed company dormant
When a company is newly formed, the HMRC will automatically be notified and within 7-10 days and they will issue the company with an “Information for New Companies” letter that contains the company corporation tax reference number (its UTR). The letter will be sent to the company registered office address, and contains important information so make sure you keep it in a safe place.
The letter will also contain a CT41G form which is used to tell the HMRC when the company intends to start trading. The form must be completed and posted to the HMRC within three months of starting to trade.
If you want the company to remain dormant with the HMRC, then you must write to them as soon as you get your “Information for New Companies” letter to tell them the company has no immediate plans to start trading. The HMRC will then set your company to dormant, and will advise by return letter to you once this has been done.
Note that if you do not write a letter as per above to the HMRC, and if you do not send them back a completed CT41G, then they will assume the company has started trading right away and after the 12 months has elapsed, they will expect a corporation tax return to be filed. There are penalties for late filing so ensure your paperwork is up to date to avoid any surprises.
For those who use our No Worries accounting service we take care of filing your company CT41G form.
So, if your company has been formed with Companies House, and has not yet started trading, AND you have advised the HMRC by letter than the company is dormant, you can simply file a set of dormant accounts with Companies House each year. The accounts are straightforward to prepare because there are no accounting transactions to report. No notification or filing is required with HMRC. Just make sure you have not yet opened any bank accounts for the business because a transaction as simple as a bank charge will impact the “Dormant” status of your company.
Making a trading company dormant
You can make a trading company dormant anytime you like so long as it is not trading and has no significant accounting transactions. Significant transactions are anything that are not Companies House fees, Companies House penalties or payment for shares that was not collected when the company was incorporated. Absolutely nothing else must go through the business (not even a bank charge) or it is automatically an active trading company.
If your company has previously been trading and you would now like to make it dormant there are several steps that need to be completed.
The most important one is all bank transactions need to be reconciled and included in the most recent annual accounts filed for the company. These accounts need to include the period where the bank account was closed down and all funds extracted from it, so that at the end of the accounting period all reported bank balances are £0, and no actual bank accounts exist for the business. Note that it is not a requirement for all business accounts to be closed however it just supplies you with a degree of safety knowing that there is no chance of any unexpected transactions such as bank fees to appear.
The period that you make your company dormant from does not need to be your most recent accounting year end. It can be any date that you choose, however for our clients it always seems to be easiest to align this with your accounting year end.
If the company is VAT registered, it must also be deregistered for VAT within this final accounting period.
Likewise for PAYE. If the company had previously been registered for PAYE, then it needs to issue P45’s to all existing employees/directors, and the HMRC must be notified that the PAYE scheme is to be ceased.
Then finally for corporation tax, once the annual accounts for the final trading period have been lodged with Companies House and the HMRC (along with the company tax return) and any unpaid corporation tax paid, then you can contact the HMRC to advise them that the company is now dormant and they will put a note on their records to show that no further corporation tax returns are required until further notice.
Filing for a dormant company
Once your company is dormant you are required to complete the following;
(a) You will still need to file annual ‘dormant’ accounts with Companies House each year.
(b) You will still need to file your confirmation statement with Companies House each year.
(c) If/when you resume trading you will need to reopen bank accounts and re-register for Corporation tax, PAYE, VAT as necessary.
Important tax considerations for 2023
From April 2023 the way corporation tax is calculated is changing, and if you have a trading company and also a dormant company, this may significantly increase the amount of corporation tax your trading company will pay. This issue is related to the “associated companies” rules which we cover in this blog article.