Dormant Company Act: Understanding the Basics
In many countries, including the United Kingdom, a dormant company is a legal status assigned to companies that are registered with Companies House but do not carry out any significant business activities. Dormant companies are usually set up for future use, and they are not required to submit annual financial statements or pay corporation tax. In this blog, we will take a closer look at the Dormant Company Act.
What is the Dormant Company Act?
The Dormant Company Act is a piece of legislation that was introduced in the UK in 2009. The act amended the Companies Act 2006 and provided a legal framework for dormant companies. Under the act, a company is considered dormant if it has had no significant accounting transactions during the accounting period.
What are significant accounting transactions?
According to the Companies House, a significant accounting transaction is any transaction that a company should enter in its accounting records. This includes any transaction that affects the company’s assets, liabilities, or equity. Examples of significant accounting transactions include:
- Sale or purchase of goods or services
- Rent or lease payments
- Payment of salaries or wages
- Interest payments on loans or overdrafts
- Dividend payments
- Payments for professional services, such as legal or accounting fees
If a company has no significant accounting transactions during an accounting period, it can apply for dormant status.
What are the benefits of having dormant status?
There are several benefits to having dormant status, including:
- No requirement to file annual financial statements with Companies House
- No requirement to pay corporation tax
- The ability to keep a company registered and ready for future use without incurring ongoing costs
How do you apply for dormant status?
To apply for dormant status, a company must submit a dormant company accounts form to Companies House. The form must be signed by a director or secretary of the company and must include a statement that the company has had no significant accounting transactions during the accounting period. The company must also ensure that it meets the eligibility criteria for dormant status. Other Useful Blog: Winding Up vs. Dissolution
What are the eligibility criteria for dormant status?
To be eligible for dormant status, a company must meet the following criteria:
- It must not have any significant accounting transactions during the accounting period
- It must not be a bank or an insurance company
- It must not be a company limited by guarantee and without share capital
- It must not be an open-ended investment company (OEIC)
- It must not be an authorized unit trust (AUT)
What are the obligations of a dormant company?
Even though a dormant company is not carrying out significant business activities, it still has certain legal obligations that must be met. These include:
Submitting a confirmation statement: A dormant company is required to submit a confirmation statement to Companies House every year. This statement confirms that the company’s details, such as the registered office address and director details, are up to date.
Maintaining statutory registers: A dormant company must maintain its statutory registers, such as the register of members, register of directors, and register of charges.
Keeping accounting records: Even though a dormant company is not required to file annual financial statements, it is still required to keep accounting records that show the company’s financial position.
Filing dormant company accounts: A dormant company must file dormant company accounts with Companies House every year. These accounts must include a balance sheet that shows the company’s assets and liabilities.
What happens if a dormant company starts trading?
If a dormant company starts trading or carries out any significant business activities, it must inform Companies House and begin filing annual financial statements and paying corporation tax. The company will no longer be eligible for dormant status and will have to meet the same legal obligations as any other active company.
Can a dormant company be struck off?
Yes, a dormant company can be struck off the register by Companies House if it meets certain criteria. This may be desirable if the company is no longer needed and is unlikely to be used in the future. The criteria for striking off a company are:
- The company has not traded or carried on any business activity in the last three months.
- The company has not changed its name in the last three months.
- The company has not been involved in any legal proceedings in the last three months.
- The company has no outstanding liabilities.
- The company has no assets other than cash at bank or in hand.
To strike off a company, the directors must complete a DS01 form and send it to Companies House. The form must be signed by all the company’s directors and must be accompanied by a fee. Once the form has been submitted, Companies House will advertise the proposed strike-off in the Gazette. If there are no objections within two months, the company will be struck off the register and will cease to exist as a legal entity.
It is important to note that if a company is struck off and has outstanding liabilities, the directors may still be personally liable for these debts. Therefore, it is important to ensure that all liabilities are settled before applying for strike off.
Conclusion
The Dormant Company Act provides a legal framework for companies that are registered with Companies House but do not carry out any significant business activities. Dormant companies are not required to file annual financial statements or pay corporation tax, and they can keep their registration for future use without incurring ongoing costs. If you are considering setting up a dormant company, it is important to understand the eligibility criteria and the application process to ensure that you meet the requirements for dormant status.
Frequently Asked Questions (FAQ’s)
Q1.) What is a dormant company?
A dormant company is a company that is registered with Companies House but is not carrying out significant business activities.
Q2.) What are the benefits of having a dormant company?
The benefits of having a dormant company include reduced costs, flexibility for future use, and limited legal obligations.
Q3.) How can a company become dormant?
A company can become dormant by ceasing all significant business activities and informing Companies House that it has become dormant.
Q4.) What are the legal obligations of a dormant company?
The legal obligations of a dormant company include submitting a confirmation statement, maintaining statutory registers, keeping accounting records, filing dormant company accounts, and paying an annual fee.
Q5.) Can a dormant company start trading again?
Yes, a dormant company can start trading again. However, it will no longer be eligible for dormant status and will have to meet the same legal obligations as any other active company.
Q6.) Can a dormant company be struck off?
Yes, a dormant company can be struck off the register by Companies House if it meets certain criteria.
Q7.) What happens to a dormant company’s assets and liabilities?
A dormant company’s assets and liabilities remain the property and responsibility of the company until they are sold or transferred.
Q8.) Can a dormant company have a bank account?
Yes, a dormant company can have a bank account, but the account must not be used for significant business activities.
Q9.) Does a dormant company have to pay corporation tax?
A dormant company does not have to pay corporation tax unless it starts trading or carrying out significant business activities.
Q10.) How long can a company remain dormant?
A company can remain dormant for as long as it likes, as long as it continues to meet the legal obligations of a dormant company.
