Coronavirus has shaken the economy, forcing many small businesses into permanent or temporary closure. The lockdown that commenced in March, which forced non-essential retailers to pull down their shutters has limited or prevented trading for a lot of independent and larger businesses.
If you’re one of those businesses that have ceased trading temporarily, due to circumstances out of your control, then you may want to register your business as dormant with the HMRC.
What is a dormant company?
The UK government deems a company that is not trading, and that has no other forms of income as a dormant company.
However, this means different things when it comes to your business finances. For example, your Corporation Tax and Company Tax returns and your annual accounts and returns for Companies House.
Dormant for Corporation Tax
Your business will be exempt from Corporation Tax if it is deemed inactive by the HMRC. The criteria for dormancy is:
- A company that has not been trading and is receiving no other forms of income – e.g. investment
- Is a new limited company that has not started trading yet
- Is an unincorporated association or club owing less than £100 Corporation Tax
- Is a flat management company
If your business is involved in any of the below activities, the government is likely to consider it as active:
- Continuing business activity (trading) or providing professional services
- Purchasing goods with the view to make profit or surplus
- Providing services
- Earning interest
- Managing investments
- Receiving investment or private funding
If the HMRC deems your company as dormant, you will receive a letter to tell you so. This means that you will not have to pay Corporation Tax or file Company Tax Returns during this period.
If you think that your business qualifies for dormant status, you should reach out to the HMRC either online or via telephone to let them know. You can find out more details about how to do that here.
How does this affect your VAT?
If your dormancy is only temporary and you know that you’ll be trading again you must send ‘nil’ (empty) VAT returns while your company is registered dormant.
If you do not intend to trade again, you must deregister for VAT within 30 days of your company becoming dormant.
Dormant for Companies House
Companies House has a slightly different definition of dormant than the one used by the HMRC for Corporation Tax. Your company is classified dormant by Companies House if it’s had no ‘significant’ transactions in the financial year.
Significant transactions don’t include:
- Filing fees paid to Companies House
- Penalties for late filing of accounts
- Money paid for shares when the company was incorporated
If your company is dormant based on the above criteria and is also dormant for Corporation Tax purposes, you must still file a confirmation statement (previous annual account) and annual accounts with Companies House.
However, if your company qualifies as ‘small’ you:
- Can file ‘dormant accounts’ instead
- Don’t have to include an auditor’s report with your accounts
Your company is classed as ‘small’ if it has any two of the following:
- A turnover of £10.2 million or less
- £5.1 million or less on its balance sheet
- 50 employees or less
Check what to include in your accounts if your company is small and dormant for Companies House here.
You do not need to tell Companies House if you restart trading. The next set of non-dormant accounts that your file will show that your company is no longer dormant.
What is the difference between dormant and non-trading companies?
A company that is not trading or carrying out business may still be involved with financial transactions. These may include rent, wages, legal fees, or private investments. All of these ingoings and outgoings should be recorded in the accounting records.
How to make your dormant company active again
When your business is ready to start trading again, you should undertake the following four steps:
- Reregister for Corporation Tax with the HMRC
- Send your accounts to Companies House within nine months of your companies end year
- Pay any owed Corporation Tax that is due within nine months and one day of your company end year
- File a Company Tax Return (including full statutory accounts) to HMRC within 12 months of your company year-end
If you’re a business owner that has ceased trading temporarily due to COVID-19, you could be eligible for dormancy status. You can find out more information on the official UK government website.
Head back to our blog for more advice and insights for small business owners.