What Is a Dormant Company? The Guide

In 2020, there were just over 6 million small to medium-sized businesses, or SMEs, operating in the UK.

That’s over 99% of all businesses.

These types of businesses account for 33% of employment and 21% of turnover. So it’s fair to say that SMEs are a booming industry within the United Kingdom.

The vast majority of these businesses actively trade on a day-to-day basis. But there are also over 300,000 dormant companies registered with Companies House.

But what is a dormant business and why might you choose to have one? We’ll take a closer look.

Here’s What We’ll Cover:

What Is a Dormant Company?

Why Choose to Have a Dormant Company?

How Do You Restart a Dormant Company?

Key Takeaways

What Is a Dormant Company?

A dormant company is a business in a state or dormancy. It has been incorporated at Companies House but is not currently pursuing any form of business activity. It must also have had no significant accounting transactions.

HMRC will consider any business that falls into this category as dormant, or inactive, for Corporation Tax purposes.

A company can be considered dormant from the date of its incorporation. Or it can become dormant after any period of time in which it previously transacted business.

Dormant companies do not have to pay any tax or file an annual corporation tax return until they resume business operations. But if your company was previously trading then it must pay any outstanding tax bills from that period of activity.

For corporation tax purposes, a company will be considered dormant if:

• It is a flat management company
• It is a new limited company that hasn’t yet begun trading.
• It is not trading and doesn’t receive any other form of income.
• It is an unincorporated association or charity.

Some people may choose to set up a dormant company instead of setting it up to conduct business. Let’s take a look at why that might happen:

Why Choose to Have a Dormant Company?

To Set Up a Company for Future Use

You may have an idea for a business and want to get it set up in advance but not actually start trading. By having this dormant company status you can be ready to start trading at short notice.

A company can remain dormant indefinitely as long as it meets certain requirements. So you could set up a company for months or even years before you actually want to start trading.

To Hold an Asset

Dormant companies can be used to hold a particular type of asset such as property. It is used to protect certain assets or even intellectual property.

To Take a Break

If you’re looking to take a break from trading then you can set your company as dormant to completely cease business operations for a period of time.

If you wanted to stop permanently then you’d just wind up the company. If you have the intention to start trading again in the future or you’re undecided then you can make your company dormant for an extended period of time.

How Do You Restart a Dormant Company?

If you are ready to make your dormant company active, there are a number of steps you must follow.

You must first contact HMRC within three months of resuming any form of business activity or receiving any form of income.

If your company had never previously traded, then it must be registered for Corporation Tax.

Once you’ve gone through the process of registering and contacting HMRC then you are free to change your dormant status. This means you can begin trading and generating income.

Key Takeaways

Having a dormant company has a number of advantages, especially for your annual return. But they also allow new business owners to set up their company in their own time without any form of financial pressure.

A new business owner can take as long as they want to set up their company whilst it is still being considered a registered company.

It also allows business owners to take a break from trading for any reason.

Are you looking for more business advice on everything from starting a new business to new business practices?

Then check out the FreshBooks Resource Hub.

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