Dormant accounts play a significant role in business compliance, especially for company directors. When a company is dormant, it’s essential to understand both the Companies House and HMRC perspectives. Although both consider dormancy differently, each perspective brings specific obligations. Accordingly, directors must navigate these to avoid fines and ensure accurate filings.

Companies House and Dormancy Requirements

Companies House defines a company as dormant if it has no significant transactions within the financial year. Notably, fees like filing charges or penalties don’t count as transactions. Consequently, even inactive companies must submit annual confirmation statements and accounts. Although these may be “light-touch” accounts, failing to submit them on time can lead to fines or, worse, removal from the register. Therefore, directors need to prioritise timely filing for dormant accounts to avoid such risks.

HMRC’s Definition and Tax Implications

For HMRC, dormant accounts take on a slightly different meaning. HMRC generally considers a company dormant for tax purposes if it has ceased trading or has no income. Additionally, it may also consider new companies that have not yet started trading as dormant. Even if HMRC issues a “notice to file” indicating dormancy, it’s the director’s responsibility to inform them if the company starts trading. Hence, regular communication with HMRC is crucial to maintain compliance and avoid unnecessary tax issues.

Reclassifying from Dormant to Active

If a dormant company begins trading, this change must be reflected in the company’s filings. When a company moves from dormant to active, it must file full accounts and inform HMRC. Likewise, even companies receiving investment income should re-evaluate their dormant status. Thus, keeping accurate records and updating relevant authorities promptly becomes essential.

Consequences of Non-Compliance

The consequences of ignoring dormant account obligations are serious. Failure to file on time can lead to fines, an adverse credit rating, or even deregistration. Therefore, staying proactive about filing requirements is a fundamental step for directors to keep their companies in good standing.

Finally, if you found this information helpful, make sure to listen to the I Hate Numbers podcast for more insights on managing your business accounts and compliance essentials.

What does the term dormant mean to you? More specifically, what does it mean to you if you're the director of a company? Now the idea of dormancy is important, and in this week's I Hate Numbers podcast, I'm going to be looking at the idea of what dormant actually means, what it means both for Companies House and for HMRC, unfortunately they're not the same, what action you need to take if your company is classified as dormant, and what do you do when it's no longer dormant.

Let's crack on with the podcast.

Now if you're a director of a company, now whether that company is one that's limited by shares, so private ownership, whether it's a limited by guarantee, whether it's a community interest company, it matters not. Your obligations to a large extent are the same when it comes to Companies House, and they're the same when it comes to HMRC, specifically with reference to corporation tax.

So let's get into it. So what does the idea of dormancy mean? Now, in some people's minds, when they hear that word dormant, it means, it's not doing a great deal, there might've been a few transactions during the course of a financial year. Therefore, in their minds, it's dormant, and therefore that might influence the action they take or the action they don't take, which could lead into fines and penalties by the regulators.

Now the general idea is that your company is considered dormant or association, so the regulations apply to clubs and associations, if it's not doing any business, it's not trading, and it doesn't have any other income like investment income. Now stated, the term dormant means different things depending whether you're dealing with Companies House or Her Majesty's Revenue and Customs to give it its full name.

We're going to refer that as HMRC. Let's look at Companies House first of all. Now, even if your limited company is dormant, you still must file your confirmation statement, which used to be called the annual return, and you must file annual accounts with Companies House. Now, the content of those accounts will be light touch, but they still have to be filed and submitted.

Now, this is even the case, even if there's been no financial activity whatsoever during the course of the year, and you don't have to file for corporation tax purposes. As I said, the content, the amount of information may be light touch, but it still has to be fine. And if you don't file them, by the way, by the due date, you will get a fine.

If you don't file your accounts on time, if you don't file your confirmation statement on time, you run a real risk of your company being removed from the register by the regulator. When is a company dormant according to Companies House? Now Companies House considers your company dormant if it hasn't had any significant transactions during the year in question. Now significant transactions don't include the finding fees that you have to pay to Companies House, doesn't include penalties for if you're late filing your accounts, and it doesn't include the money the funds you provide,

when the shares were initially acquired when the company was incorporated. Now, if you are dormant, so many clients that I've come across may form a company or request us to form a company because they want a name. They should get things set up, but they don't intend to do anything with that for some time.

Now, the good thing is if you do start to move from dormant to active trading, then you don't need to inform Companies House of that. Companies House is a regulator, it’s a repository of that information and its responsibilities I'm going to be talking about in a future podcast. When you do submit those accounts when they're no longer dormant, you stipulate that within the accounts themselves.

Let's have a look at the situation for HMRC specifically with reference to corporation tax. Now your company is normally considered dormant for corporation tax if it has ceased trading, has no other income like investment income. It may be a new company that hasn't actively started trading, and remember this applies whether it's a company limited by shares, limited by guarantee, a community interest company.

If you have an unincorporated association like a club. Clubs come under the regime of corporation tax, by the way, and if you own less than 100 pounds, that's perfectly fine. If you also are a flat management company, typically found in the arena of property, that also suits the definition. So, what does trading actually mean?

Well, trading will include activities where you buy and sell goods or services. You rent out property, you expend funds on advertising, taking on staff, generating interest on deposits. It doesn't have to mean that you're generating a profit, but there is a financial activity, even if you've only got say a half a dozen transactions during the course of the year.

That is an active company. Now, HMRC does give further detailed guidance on what counts as dormant for corporation tax purposes, or check the notes here, give us a call, and we can advise you accordingly, speak to your accountants. If you don't have one, then you need to find one. Now, in addition, HMRC may issue correspondence to you, may issue a letter saying that they have decided to treat your company, or association as dormant.

They will stipulate and state that you don't have to pay corporation tax or file company returns, and there's a little bit of a caveat here. If you do receive such a letter, but then you do start trading, it's your responsibility to file the corporation tax return accordingly. This is HMRC effectively saying, from what we've seen, you don't have to file a corporation tax return, but it's your responsibility to inform us if the situation changes.

Let's now look at what happens when your company is dormant and what you need to do with respect to HMRC. Now if your company has stopped trading, it's got no other income, then it's up to you to inform HMRC that the company is dormant for corporation tax purposes. If HMRC has actually issued what's called a notice to file, a notice to deliver a corporation tax return, you need to file a return online. Within that corporation tax return, there is the facility to notify HMRC that the company is dormant and fingers crossed their systems work effectively and they can join the dots. Now if you are in a situation where your company is dormant and then the company starts trading or the company receives funding,

if you're a C.I.C., you're funding, that means that you can actually commence, then there are certain steps you need to take to make sure you maintain compliance. The key one is, is to make sure HMRC is informed, to make sure those accounts are filed on time, and remember, folks, just to wrap up, even if there is no financial activity occurring, Companies House will expect accounts from you and the confirmation statement as a bare minimum.

The consequences of not listening to the rules, if you're a company, is that you will face a financial penalty and potentially an adverse credit risk rating as well on the company, and potentially if the confirmation statement is not filed on time, then that could mean your company is removed from the register.

I hope you found this podcast useful. There are obligations placed on us running companies. We need to make sure that we pay attention to what those obligations actually are. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.