Do you have a business that is not making any money? Is it taking up too much of your time and energy, but you are unable to let it go? Have you considered what would happen if the company was made dormant instead of being closed down entirely? There are many reasons why business owners decide to make their company dormant but it can be an advantageous way to save money and plan for the future.
This article will discuss everything that goes into making a company dormant, as well as the benefits and rules of dormancy.
What does making a company dormant mean?
When a company is made dormant, it means that the business will no longer be active. However, it will remain on the register of companies throughout its dormancy period. This means that all documentation is still required to be filed with Companies House and must follow applicable laws. However, you won’t need to file any returns or pay corporation tax for the duration of its dormancy.
What types of business structure can be made dormant?
Any type of company can become dormant but there are certain rules for each structure. For example, LLP’s cannot become dormant unless they have a single member who wants to close the business without liquidating assets or transferring them elsewhere. A limited company has more options when choosing what type of closure they want including voluntary liquidation or deregistration from the Registrar at Companies House. Sole traders and partnerships do not even need to take any action as long as they aren’t trading and no longer have any business activity.
Why do business owners make their companies dormant?
There are several reasons why a company would decide to make their company dormant instead of closing it down entirely, including the following:
- The business seems like it will never start making any money, so there’s no point in paying annual fees or following other regulations for a non-existent enterprise.
- A new opportunity may arise in the future and you want your old structure to be available when that happens. This can save you time and money since there is no need to re-register with Companies House or change structures entirely.
- If you’re planning on selling your company but haven’t yet found a buyer, making your business dormant will allow potential buyers an easier transition into ownership without taking over operations at once. Making your business inactive also shows them that the company is free from debts and requires less work to get started.
- If you have a business that has been dormant for over two years, then it will be exempt from corporation tax as long as all statutory accounts are filed on time. You can even apply to have your limited company remain active if this also helps with other government agencies such as VAT or PAYE.
- You don’t need any special permissions to make a company dormant since there isn’t anything being transferred during closure which means none of the legal fees involved in shutting a company down completely. This also means less work if you have a sole trader or partnership.
- You can keep your company name in use which will preserve its reputation and allow it to be revived at any time in the future for the reestablishment of business activity. This is especially helpful when dealing with government agencies that may require paperwork before approving a restart if the business has been dormant for several years.
How do you make your UK company dormant?
There are several steps you need to take in order to make your company dormant:
- Make sure the business is no longer actively trading or conducting any activities.
- Lay off any employees and pay any debts before allowing for dormancy. If you try to do this after making the company dormant, these actions will be classed as activity so Companies House will not uphold the dormancy status.
- Notify HMRC, VAT and PAYE if the business has any outstanding debts or these agencies need to be contacted before it can become dormant.
- Once you feel comfortable with removing yourself as an active member on paper, go ahead and notify Companies House by filing in the appropriate forms online.
When is your company dormant for corporation tax?
Your company will be considered dormant for the paying of corporation tax when:
- you have ceased trading and so have no income
- you are a new LLC and haven’t begun trading
- you are an unincorporated association or club that owes <£100 corporation tax
For more information about dormant companies and corporation tax, you can visit the government’s official website here.
When is your company regarded dormant by Companies House?
Companies House treats dormant companies differently depending on whether it views your company as a “small” business entity or a “micro” business entity.
Small business entities
These are companies with:
- an annual turnover of less than £10.2 million
- a balance sheet below £5.1 million
- fewer than fifty employees
When Companies House classes your small business as dormant it means that you can:
- file dormant accounts
- get exemption from auditing your company’s accounts
- decide whether you want to send profit/loss accounts and director’s reports to Companies House
- file simpler abridged accounts with Companies House
These are companies with:
- an annual turnover of less than £632,000
- a balance sheet below £316,000
- fewer than ten employees
When Companies House classes your micro entity as dormant it means that you can:
- organize more basic accounts as long as they meet the necessary requirements
- file a simplified balance sheet only to Companies House
- receive the same auditing exemptions that small entities receive
How do you notify HMRC about making your company dormant?
Before you make your company dormant, you will need to let HMRC know about its future status as soon as possible.
You can inform HMRC of this step by sending them a letter or completing the appropriate form. It is also recommended that you keep copies of all correspondence with the tax agencies and that you send all correspondence via recorded mail.
VAT and PAYE considerations
If your company is VAT registered, you will need to de-register within thirty days of making it dormant. You should also end your PAYE scheme at the same time until you want to restart the company again.
What if assets exist when making a UK company dormant:
If there are any assets in your company when it is made dormant, you must pay for the shares to be transferred which will avoid the business being forced into liquidation. If this proves too expensive, then you can sell off all of these assets before making a company dormant.
You also need to ensure that there are no outstanding debts or liabilities owed by the company as this may prevent dormancy from taking place. To do this, you will need to sell off any assets that are owned by the company and then you can pay all creditors.
You have two options when it comes to this process:
- Sell your business as a going concern – This means selling the entire company, including share capital, property, stock etc., for payment in cash or credit. The buyer takes on all of your liabilities so there is no risk of being sued after making a UK company dormant.
- Transfer shares into new ownership – If you want to sell some or part of your business before transferring its shares out of the name completely, you must make sure that debt holders agree with this action first; otherwise, they could force your company back into liquidation if their debts remain unpaid even though the business has been made dormant.
Alternatively, if you don’t want to sell your company, then you can close it down completely by transferring ownership of its share capital to another person or organization that is willing to take on all debts and liabilities for a fee. You will need to contact creditors yourself if they are owed money so they know what has happened before closing the business down completely.
How can you restart your dormant company?
To restart your dormant company, you will need to do the following:
- File a confirmation statement with Companies House
- Apply for VAT and PAYE schemes if needed
- Make sure there are no outstanding liabilities or debts owed by the business when it comes back into operation.
- Pay debts before making the company active again
There are no restrictions on how long a company remains dormant so it is up to you how long you want to keep hold of your inactive business before reactivating it again (or leaving it dormant), but most companies remain dormant for around six months at most. That said, remember that VAT registrations have an expiry date after which they cannot be used anymore unless renewed. The same also applies to PAYE schemes so you will need to keep track of these if they are attached to your dormant business.
What laws and restrictions are there for dormant companies?
Currently, there are no laws or restrictions for dormant companies in the UK. However, if you fail to inform HMRC of your company’s status and it is deemed by them to be still trading (even though it has been inactive), then penalties may apply. These may include your business paying any outstanding corporation tax or even being shut down completely if deemed an illegal business.
Companies House will still expect you to keep them informed of your business’ status so they can maintain accurate records even though no trading is taking place. However, there are some instances when HMRC won’t allow dormant companies:
- If the company fails its statutory obligation in terms of filing accounts or confirmation statements with Companies House
- If it’s been struck off for not paying its annual fee/confirmation statement fees but then becomes active again within one year
- If it has become inactive before and never paid the taxes it owed plus interest
- You have failed to tell the same agency that your company was made dormant twice in a row
As long as you follow all requirements from HMRC when making your company dormant again, it will be fine to keep hold of an inactive business without any problems arising. Just remember that taxes still need paying even though trading isn’t taking place so don’t wait till the last minute before reactivating.
Does a dormant company need insurance?
A dormant business will not need any insurance policies in most cases because it is inactive, but you may wish to consider taking out certain cover just in case it needs to be restarted again. For example, if the company owes money when it becomes active one day then this debt could become your responsibility which means that professional indemnity or directors and officers insurance could be useful.
Some companies also take out professional indemnity cover as part of their standard business package just in case something goes wrong with the administration side. These may be files that need updating or accounts that need refiling, so consider what you might need to do before making your dormant company active again.
You should always contact a specialist insurance provider about how much it will cost for any extra cover needed when restarting a dormant business because they will know exactly what is required. It is usually better to be safe than sorry, so if there are any potential risks or liabilities that you are worried about such as somebody trespassing or burgling your offices, it may be worth getting the peace of mind that insurance can provide.
Making a company dormant is a relatively easy process but you need to ensure that you follow all the correct steps. Following the rules around dormant companies and keeping HMRC and Companies House up to date with what’s going on will help to avoid any potential penalties. Remember that you must pay any debts or liabilities before making your company dormant and that there can be no trading at all after that time. There are many benefits to making your company dormant rather than closing it down permanently, and as long as you follow the rules, you will still have the opportunity to be successful with the company in the future.