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Definition of dormant company

GUIDE

You may be asking yourself, what defines a dormant company? Who defines a dormant company? What does it mean for a company to be dormant for a period of time? In this guide we provide a comprehensive explanation as an answer to these and related questions followed by a checklist to make it easier to determine whether you have a dormant company.

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Most companies are actively running a business as they were set up for such a purpose. But not many start out active, and some even go through a period of inactivity before resuming trading again. When a company is not active, it is said to be dormant - it does not trade and has no transactions. A company could be dormant for any particular financial year or over its whole life since incorporation.

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A dormant company in the UK is a company that has ceased trading or is otherwise inactive, meaning it does not engage in any significant financial transactions. The term "dormant" in the context of corporate entities is defined primarily by the requirements of Companies House and HMRC. Dormant companies may have numerous applications, including holding intellectual property, safeguarding a company name, or preparing for future activity. However, even in its dormant state, such a company remains a legal entity subject to specific obligations and regulations.

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However, dormant means slightly different things for Companies House and HMRC:

 

For Companies House, a company is dormant if it has had no 'significant transactions’ for the year. The following are not significant transactions:

  • Payments for shares when the company was initially incorporated.

  • Fees paid to Companies House for filing annual confirmation statements or change of details.

  • Penalties incurred for late filing of statutory documents.

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For HMRC, a company is dormant if it has not traded and there is no corporation tax liability for the year. There are specific circumstances where a company is dormant according to HMRC, which are:

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  • has stopped trading and has no other income, for example investments (trading includes buying, selling, renting property, advertising, employing someone or getting interest)

  • is a new limited company that hasn’t started trading

  • is an unincorporated association or club owing less than £100 Corporation Tax

  • is a flat management company

 

But overall, both definitions are almost identical and it effectively means that if your company is dormant according to one, it is dormant according to both.

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A trading company is actively conducting business operations, such as buying, selling, or providing services for profit. This activity triggers a series of obligations, including paying taxes, filing full accounts, and keeping records of transactions. In contrast, a dormant company is not involved in such activities. A company might become dormant if it has ceased its trading activities but remains in existence, or it may be created specifically to hold assets or intellectual property, with no immediate trading plans.

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Some typical circumstances of dormant companies are:

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  • Newly-formed companies: When a company is incorporated, it is often initially dormant. This may be due to the company's directors planning for a future project or business, which will commence after a certain period.

  • Ceased trading: A previously active company that has temporarily or permanently ceased trading but is not yet dissolved can be considered dormant. In such cases, the company retains legal standing without generating new financial activity.

  • Holding companies: Some companies are created to hold assets, such as shares in other companies, intellectual property, or real estate, without performing any active trading activities. These are often set up as dormant companies to maintain a legal framework without incurring significant tax or administrative obligations.

  • Non-profit organizations: Charities or non-profits may have dormant companies in their structures, perhaps to safeguard names or assets or to hold subsidiary companies in case they need them in the future.

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Dormant companies are not merely legal shells waiting for dissolution; they can serve strategic purposes for businesses and individuals, some of which are the following:

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  • Name protection: A common reason for keeping a company dormant is to secure a company name. Companies House does not allow duplicate or very similar names, so a business may incorporate a dormant company to "reserve" a name for future use. This can be an essential strategic move, especially in competitive industries where brand identity is crucial.

  • Asset holding: Dormant companies may hold intellectual property (IP), real estate, or shares in other businesses. By maintaining these assets in a dormant company, owners can separate liabilities and protect the assets from business risks.

  • Mergers and acquisitions: Companies involved in mergers or acquisitions may use dormant entities to manage the restructuring process. For example, a dormant company can be activated when needed for transferring assets or absorbing another company. Dormant companies may also be part of a group structure that is only operational when specific conditions are met.

  • Tax efficiency and planning: In certain cases, dormant companies can be used as part of tax planning strategies. While not directly generating tax benefits during their dormant period, they can be instrumental in group structures that defer or minimize tax liabilities.

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A company can remain dormant for an extended period, but if its directors decide to start trading, the process to resume activity is straightforward. The company must:

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  • Inform HMRC: HMRC must be notified within three months of any trading activity commencing. The company will then need to register for corporation tax, payroll (if employing staff), and VAT if applicable.

  • File full accounts: Once a company resumes trading, it will need to file full accounts at Companies House, reflecting its financial activity during the period it was active.

  • File tax returns and potentially VAT: The company must resume filing annual tax returns and may need to register for VAT if its taxable turnover exceeds the VAT registration threshold.

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Dormant companies play a vital role within the corporate landscape, offering flexibility and strategic advantages for businesses. While dormant companies are inactive from a trading perspective, they remain subject to several legal and regulatory requirements to maintain their status. Whether used to hold assets, secure a business name, or prepare for future activity, dormant companies provide a useful mechanism for businesses and individuals alike. However, compliance is essential; even though dormant companies enjoy simplified reporting and tax exemptions, failing to meet the few obligations they do have can result in penalties or dissolution.​​

Checklist: determining whether your company is dormant for Companies House and HMRC

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For Companies House

A company is considered dormant by Companies House if it has had no significant accounting transactions during a financial period. Use this checklist to determine if your company qualifies as dormant for Companies House.

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1. Review recent financial transactions

✅ No trading activity: Has your company engaged in any buying or selling of goods or services?

✅ No bank transactions: Has your company made any bank deposits or withdrawals (other than for permitted expenses - see 'significant transactions' above)?

✅ No payroll activity: Have you paid any salaries or wages to employees or directors?

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2. Check for permitted transactions

Companies House allows certain transactions without disqualifying a company from dormancy status. These include:

✅ Incorporation fees: Have you only paid for the issuance of shares when the company was incorporated?

✅ Filing fees: Have you only paid fees to Companies House for filing your confirmation statement or changing company details?

✅ Fines: Have you paid any penalties for late filing of accounts (which are still permitted for dormancy)?

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3. Evaluate company assets

✅ No significant assets: Does your company hold any active or revenue-generating assets (e.g. investments, real estate property, intellectual property that generates income)?

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4. Verify non-operational status

✅ No ongoing contracts: Has the company refrained from entering into any significant contracts or obligations?

✅ No dividends: Have no dividends been declared or paid to shareholders?

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If your company meets these conditions for a full financial year, it is considered dormant by Companies House.

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For HMRC

HMRC uses slightly different criteria, focusing on tax-related aspects. A company is considered dormant by HMRC if it has no taxable income or trading activity. Follow this checklist to assess whether your company qualifies as dormant for HMRC.

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1. Determine trading status

✅ No trading income: Have you stopped selling goods or services?

✅ No sales invoices: Have you issued no invoices to customers?

✅ No contracts for work: Is your company not engaged in any contracts to provide goods or services?

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2. Check for financial income

✅ No interest income: Has the company earned no interest from bank accounts or other financial investments?

✅ No rental income: Has your company refrained from generating income from properties or assets it owns?

✅ No dividends received: Has the company avoided receiving dividends from investments?

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3. Verify employment and payroll activity

✅ No staff payroll: Are you not employing staff or paying wages to directors?

✅ No PAYE or National Insurance: Are you avoiding any tax obligations related to employees or directors (such as Pay As You Earn – PAYE)?

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4. Confirm tax-exempt status

✅ No corporation tax returns filed: Have you informed HMRC that your company is dormant and are no longer required to file annual corporation tax returns?

✅ No VAT returns: Is your company deregistered from VAT (if applicable), or is it not required to submit VAT returns due to inactivity?

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5. Check other financial transactions

✅ No financial investments: Has the company avoided making financial investments that generate taxable income?

✅ No large asset acquisitions: Have you refrained from purchasing assets that would need to be depreciated or recorded for tax purposes?

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If your company meets all these conditions for a full financial year, HMRC will consider it dormant.

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​Click on this link to read more about whether you need to file a corporation tax return.

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