Normally a limited company will be a business. Trading to create a profit, which will in turn be taxed by HM Revenue and Customs (HMRC). Less often, companies are formed for other reasons, such as to hold onto an asset or ensure a company name is kept safe from being used by someone else.
These are known as dormant companies. A dormant company is a company that HMRC deem as not trading for corporation tax services.
What counts as active for corporation tax?
HMRC define a company as active when it is engaging in activities that generate an income. This includes carrying on a business activity, managing investments or even earning interest. This is not the same as other definitions for trading with respect to VAT or Companies House. The definitions may also not match those set by various accounting conventions used to prepare audited accounts.
When does a company not count as active?
The main period in which a company is not counted as active for corporation tax purposes will be after it has been incorporated but before it starts trading.
As long as the company has not started selling goods or services or been involved in an activity that would generate income it will not count as trading and therefore not be active. The company can still engage in activities and incur expenses as it prepares to trade without having to become active. These activities include those along the lines of writing a business plan or negotiating contracts.
A company can also inform HMRC that it has ceased trading and then become dormant.
What does it mean to be dormant?
HMRC views a dormant company as a company that is not required to complete a corporation tax return. There are a variety of reasons a company can be dormant, such as being inactive as mentioned above or a company that has been formed for another purpose, such as to be sold by a company formation agent or to take ownership of an asset like land or intellectual property.
Obligations for a dormant company
A dormant company still has obligations to fulfil for Companies House, even if HMRC do not require a tax return. The company annual return (a document containing company details such as the registered office and share capital) still needs to be completed each year. A simplified set of company accounts known as dormant company accounts also need to be completed. These accounts show the balance sheet of the company, which for dormant companies usually consist of shares and the amount paid/unpaid on each share.
Failure to keep these documents up to date could result in fines or the company being dissolved by Companies House (meaning the company would no longer exist).
When the company becomes active
If the dormant company becomes active, HMRC must be notified within three months. This is most often done through the government gateway, however it also be done by post using the form CT41G which HMRC will have sent soon after the company was incorporated.
If you have any questions regarding the above or for limited companies and corporation tax in general, please do not hesitate to contact us.