What’s the deal with dormant companies?
Where you own a company which is not much more than a shell, the Taxman won’t insist on Corporation Tax returns. That’s good news, but if you simply stop submitting forms, you’ll still be hit with a penalty. So what can you do to avoid this?
Reasons to be dormant
When you form a company there will usually be some days, weeks or even longer when it’s just sitting around waiting for your new venture to start. Strictly, the Taxman can ask you to complete a Corporation Tax (CT) return for this period even if it only lasts a few days. But thankfully he takes a practical approach to so-called “dormant companies” and only expects a CT form from the point at which your company becomes active. The same principle applies where your company has ceased all activity and becomes dormant. But if the Taxman isn’t aware that your company is dormant, he’ll expect a return, and the fine for not submitting one can be up to £1,000.
Don’t delay
The Taxman assumes that a new company starts trading from day one, and that a company that was active remains so, until he’s told otherwise. In the case of a recently formed company all you need to do is to complete and submit a Form CT41G(see The next step). But where your company has ceased activity, you’ll need to write to the tax office that previously issued the CT return. We say “previously issued” because the introduction of compulsory Internet filing from next April means that the Taxman no longer sends out paper forms.
Trap. If you don’t get a CT return, it doesn’t mean that the Taxman knows your company is dormant, and if you don’t tell him and don’t submit a form you will be fined!
I’ve told you once
Having informed the Taxman that a company is dormant he’ll assume it stays that way until you tell him otherwise. So when your company starts, or restarts, an activity you should notify the Taxman using Form CT41G.
Are you active?
Unless your company is inactive, it won’t qualify as dormant for tax purposes. But inactive means more than just not trading. This is where the Taxman’s rules become a little sketchy. His manuals say that a company is inactive “if it has no significant accounting transactions”. This would, for example, exclude a company which had been formed with, say, £1,000 of share capital that is placed in an account that paid interest.
Tip 1. Whilea few pennies of interest should be OK, our advice is that if you want to guarantee dormant status and so avoid having to submit CT returns, keep any money the company has in a non-interest producing account.
Tip 2. A company can still count as dormant where it owns substantial assets as long as they don’t produce income. For example, it’s quite common to hold land or buildings linked to your business separately from the trading company.
Trap. Not having to submit a CT return will certainly save you time and accountants’ fees but don’t forget you must still submit annual accounts to Companies House. Although, you’ll be pleased to hear that there’s a shortened format for dormant companies (see The next step).
For a link to HMRC’s CT41G webpage (TX 10.22.04A and for information on dormant company accounts (TX 10.22.04B), visit http://tax.indicator.co.uk.
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