Contractors who have decided to make their limited company dormant must continue to file basic information with Companies House. This includes filing dormant company accounts in the abbreviated format required by the Registrar of Companies.
Making your contracting limited company dormant is a straightforward process but there are HMRC and Companies House rules that must be followed. Even if the company no longer trades, it must continue to file an annual return and accounts, and keep company information details up-to-date.
Only companies that have never traded can file the simple AA02 Dormant Company Accounts (DCA) form. If a contractor’s company has traded and invoiced just once, it must always file abbreviated dormant accounts.
Why should I make my limited company dormant?
Circumstances can change for contractors who have been trading via a limited company. A classic scenario is a return to permanent employment, when a contractor is offered a role that is too attractive to turn down despite the tax advantages of limited company contracting.
Alternatively, a contractor may be offered a lucrative contract that is inside IR35 and decides to trade via an umbrella company for a time. Or they may be special circumstances, such as a sabbatical maternity leave or even securing a contract in a location such as Germany where there are specific rules and it is not possible to legitimately trade via a contracting limited company.
If the contractor is likely to resume using the company within three years, most accountants would recommend making the company dormant during that period. However, if the change from limited company contracting is long term or permanent, then it may be more cost effective to close down the contracting limited company.
Closing down or making a company dormant cannot be used as a strategy to avoid an IR35 investigation. HMRC can readily investigate dormant or dissolved companies, and can still investigate a contractor’s past tax affairs.
What happens when the company first ceases trading and becomes dormant
If a contractor ceases trading part-way through a financial year, and that trading will lead to a corporation tax liability, then full statutory accounts need to be prepared and a corporation tax (CT) self-assessment tax return must also be filed online with HMRC.
After that, assuming there has been no trading activity that could result in corporation tax, no more tax returns are required. Unless it suspects there has been fraudulent activity, or there is reason to suspect IR35 might have applied to a contract in the last six years, HMRC will no longer take an interest.
However, dormant company abbreviated accounts must still be filed with Companies House and any changes to the company’s details must also be notified, and technically be available for public inspection.
Dormant company abbreviated accounts – filing example
Companies House provides detailed guidance about what accounts must be filed for different trading vehicles. The dormant company abbreviated accounts are very simple and must include an abbreviated balance sheet with notes to the accounts.
There are also statutory statements that need to be made by a director, which should appear with the balance sheet. These include acknowledging the directors’ reporting responsibilities and the company’s exemption from audit.
Dormant company accounts submitted to Companies House do not need to include a profit and loss account or a directors’ report. However, technically full accounts should be prepared for shareholders.
An annual return must also be filed each year. This confirms basic company information such as the name, registered office address, directors’ and company secretary’s details, shareholders’ details and where the company records are held.
What are the penalties for not filing dormant company accounts?
Failure to submit dormant company accounts or an annual return will incur penalties from Companies House. Its guidance on penalties says: “Failure to file annual returns or accounts is a criminal offence which can result in directors being fined personally in the criminal courts”.
Any fines for directors are in addition to statutory penalties that must be paid by the company. Fines start at £150 but grow rapidly to £1500 and can be doubled if the company persistently files it dormant company accounts late.