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Dormant limited companies: guidance on HMRC and Companies House rules for contractors

Contractors choosing to maintain a dormant limited company must abide by strict rules set out by HMRC and Companies House. According to David Colom, of contractor accountant DJ Colom & Co, even a single trading transaction could cause a company to lose its dormant status.

“Dormant companies can file abbreviated accounts or a simple Dormant Company Accounts form,” explains Colom. “But if the company engages in a single transaction, even something minor such as receiving bank interest, it is deemed by Companies House to be trading and a full set of trading accounts must be filed.”

“However, it is only under exceptional circumstances that I would recommend contractors retain dormant companies, as the benefits of closing a company outright generally far outweigh the costs and benefits of maintaining dormant companies.”

What makes a company dormant: HMRC vs Companies House

There are subtle but important distinctions between the Companies House definition of a dormant company and HMRC’s. According to Companies House, “a company is dormant if it has had no ‘significant accounting transactions’ during the accounting period”. The accounting period is the financial year of the contractor’s limited company.

“This means that a contractor must not generate any fee income from client work or even bank interest during the financial year in which the company becomes dormant,” continues Colom. “Even if a contractor only traded for six months of the year, a full set of accounts for the entire financial year must be filed.” The only transactions allowed are Companies House fees and penalties, as well as expenses and income from the previous financial year.

HMRC, on the other hand, is interested in whether a contractor limited company is “active for corporation tax purposes”. Its online guidance says that a company is dormant if:

  • It has not yet started trading, ie a contractor has incorporated a company but has yet to win and invoice a client. A company can incur pre-trading expenditure without losing its dormant status
  • It has ceased trading, ie a contractor is not currently working and has no immediate plans to find new contracts.

“HMRC is only interested in companies whose activity is likely to lead to a corporation tax liability,” adds Colom.

Dormant company reporting requirements

Companies House requires a contractor limited company that ceased trading part-way through a financial year to provide a full set of company accounts for that year. If the contractor wishes to keep the company, for the next two years dormant company accounts must be submitted. These differ from full accounts in the following ways:

  • No profit and loss account or directors’ report is required
  • A balance sheet must be submitted, signed by the contractor/director and stating that the company is dormant.

Once a company has been dormant for two years, a contractor can then submit a much simpler Dormant Company Accounts (DCA) form. Companies that have never traded since they were incorporated only have to submit an AA-2 Dormant Company Accounts (DCA) form from the outset.

Contractors do not have to complete and submit a corporation tax return if the company has not traded in the financial year, and they should inform HMRC that the company has become dormant. But if it did trade for any part of the year, a corporation tax return must be submitted.

Keeping a dormant company is similar to owning a car but not needing or using it. You would not incur car insurance and road fund licence costs unless you had to, you would get rid of the car. The same principle applies to a limited company.

David Colom, D J Colom

If a contractor is registering a company that is never intended to trade, they should also inform HMRC of its status. This is an important step, because HMRC is automatically informed via Companies House of any new company incorporations and will assume they will require registration for corporation tax unless told otherwise.

Dormant companies – why bother?

According to Colom, most contractors don’t bother making a company dormant or register a company with the intention of never trading. He explains: “There are only really four scenarios when a contractor limited company is likely to be or become dormant:

  • To protect a contractor’s brand by registering a limited company with that name
  • Incorporating a company at the start of a contracting career that fails to get off the ground in the first 12 months
  • A gap between contracts in excess of 12 months, or longer, when the contractor has been unable to find work, or unable to work through illness, but intends to resume trading as a contractor
  • The contractor is planning to remove the company from the Companies Register, but has not yet done so.”

Few contractors set out with the intention of building named brands that require protection through registering the company name, but this can become an important factor if a contractor decides to grow their business beyond contracting. And very rarely, a dormant company is used to own a fixed asset, such as a property freehold or licence.

“Keeping a dormant company is similar to owning a car but not needing or using it,” says Colom. “You wouldn’t incur car insurance and road fund licence costs unless you had to – you’d get rid of the car. The same principle applies to a limited company. And the analogy holds true if you only need to trade for a short time. If it were a car, you’d hire one. An umbrella company fulfils the same purpose, enabling a contractor to trade for a short period when needed.”

Published: 22 November 2011

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