Dormant Limited Company
Navigating the intricate landscape of self-employment is no easy feat, especially for contractors. Amidst the myriad of regulations, one term stands out prominently: Limited Companies. But what is a dormant limited company?
In this comprehensive guide, we delve deep into the heart of limited companies. Whether you’re an aspiring contractor or a seasoned veteran seeking clarity, this guide aims to empower you with the knowledge to make informed decisions.
What Is A Dormant Company?
There may come a time when you want to put your limited company in an ‘inactive’ state; this is known as making a company dormant.
A company can be considered dormant if it has had no significant accounting transactions during the period. A significant accounting transaction is one that the company should enter in its accounting records. They do not include filing fees, penalties for late filing, or money paid for shares when the company was incorporated.
To be considered dormant, your company cannot trade or receive income from other sources (such as investments). HMRC consider your company to be trading if you are:
- Carrying on a business activity such as a trade or professional activity;
- Buying and selling goods to make a profit or surplus;
- Providing services;
- Earning interest;
- Managing investments; or
- Receiving any other income.
As dormant companies are inactive, they are not liable for corporation tax.
Why Make A Company Dormant?
There are many instances where it is beneficial for contractors to make their company dormant:
- If you have traditionally worked Outside IR35 but recently won an Inside IR35 contract and need to work through an umbrella company, you may wish to dormant your company.
- If you want to take a break from contracting, such as an extended sabbatical for a year or more, you may wish to make your company dormant.
- If the contracting market dips, and you decide to take a permanent role but want to return to contracting later, you may wish to make your company dormant.
Making your limited company dormant means you can restart it again with minimal effort. It is far simpler than closing the business and incorporating a new company when you’re ready to start again. It also ensures your business history continues uninterrupted.
How To Inform HMRC Your Company Is Dormant
You can use HMRC’s online service to tell them that your company is no longer trading and is dormant for corporation tax purposes. Before you start, you will need:
- Your company’s name;
- Your 10-digit Unique Taxpayer Reference (UTR); and
- The date your company stopped trading (if it began trading).
Here’s how to find your UTR number if you do not know it.
What Are My Resonsibilities?
Your responsibilities as a limited company director do not stop if you make your limited company dormant. Luckily, they are very straightforward.
i) VAT
If you have made your company dormant and do not intend to trade again, you must deregister for VAT within 30 days of your company becoming dormant. If you want to trade again or are unsure about the business’s future, you do not need to deregister for VAT. Instead, you must file ‘nil’ (empty) returns while your company is dormant.
ii) PAYE
Your PAYE scheme will continue to run despite your company being dormant.
If you don’t intend to pay any salaries for three months or more, put ‘Yes’ in the ‘Irregular payment pattern indicator’ on the last Full Payment Submission (FPS) you submit. You must also submit an Employer Payment Summary (EPS). Enter dates in the ‘No payments due’ fields for gaps in the current or last tax months. For gaps in the next 12 months, enter the relevant dates in the ‘Period of inactivity’ fields.
If you don’t intend to start trading again or think you will keep your business dormant for over a year, you could close your PAYE scheme. It is straightforward to reopen if required.
iii) Corporation Tax
If your company is dormant for the full financial year, you will not have any tax liabilities and will not have to prepare a Company Tax Return for HMRC. If your company became dormant (or restarted trading) partway through a financial year, you must pay tax on any income generated when the business was active.
Once you have notified HMRC that you are dormant for corporation tax purposes, a ‘Notice to Deliver a Company Tax Return’ will be sent to your registered office address. You will then be required to prepare a company tax return and accounts for HMRC, and pay corporation tax on any profits made up to the point your company becomes dormant.
After doing so, your company will be considered dormant, and you will no longer be required to prepare Company Tax Returns.
iv) Company Accounts
As a director, you must prepare accounts for Companies House every year, even if your company is dormant. Fortunately, dormant accounts are simpler than trading accounts.
Dormant company accounts submitted to Companies House do not need to include a profit and loss account or directors’ report. They must still contain:
- A balance sheet containing statements above the director’s signature and their printed name to the effect that ‘the company was dormant throughout the accounting period’;
- Any previous year’s figures for comparison – even though there are no items of income or expenditure for the current year; and
- Certain notes to the balance sheet.
Dormant company accounts can be filed online, and the deadline is the same as trading accounts: nine months and one day after your financial year-end.
v) Confirmation Statement
All companies must prepare an annual confirmation statement at least every 12 months, even if they are dormant. The requirements for a confirmation statement, whether dormant or active, are the same.
Withdrawing Money From Dormant Company
Extracting money from your dormant company will trigger a clause in the Companies House rules and instantly make the company active again. If you wish to extract money from your limited company before making it dormant, you should:
- Maximise director’s pension contributions;
- Repay any outstanding loan balances’ or
- Pay a final dividend.
You can, of course, leave money in the limited company. You just won’t be able to access it until you decide to restart the business or close it down.
How To Restart A Dormant Company
If you decide to start trading again, you must tell HMRC within three months of your dormant company becoming active. If your company has previously traded, you can sign into your existing HMRC online account and re-register the business as ‘active’ for corporation tax purposes. You will then submit tax returns and pay taxes as usual. Your next set of accounts will be trading as opposed to dormant.
Contractors And Dormant Companies
Dormant limited companies have no ongoing administrative responsibilities beyond filing the annual accounts and the confirmation statement. These filings are due once a year and take no longer than 10 minutes each.
While trading accounts can be complicated and usually require the assistance of an accountant, dormant accounts are straightforward. Most of the financial data is prepopulated by HMRC’s systems using records of previous periods.
If nothing has changed within the business, which it is unlikely to have done, considering it is dormant, then confirmation statements are also very straightforward. They’re a tick-box exercise confirming the details that Companies House holds are correct.
Many contractor accountants offer to maintain a dormant company for reduced monthly fees ranging from £25 to £75. Contractors looking to save money could:
- Pay a one-off cost to an accountant, asking them to notify HMRC of the dormant status and prepare the final set of trading accounts and tax return;
- Deregister for VAT and PAYE, if applicable. Your accountant may do this as part of the one-off fee;
- Perform the ongoing administrative responsibilities of filing dormant accounts and a confirmation statement themselves.