Category : Accounting
What are dormant companies?
A dormant company is a company which does not carry out a trade. To qualify as dormant, a company must either be non trading in its first year of existence, or otherwise be non trading for two consecutive years.
What difference does being a dormant company make?
Dormant companies can file simplified single page accounts, and are exempt from audit even if they are part of a group which requires auditing.
What level of activity constitutes trade?
It’s not clear. A maximalist interpretation would find that the company trades if it incurs expenses, even if those expenses are settled by the shareholders. As every company pays an annual £13 filing fee, that would preclude any company from being dormant – so this interpretation is clearly not accepted in practice.
A more reasonable interpretation would find that a company is dormant if:-
- All its expenses were paid by the shareholders. Even a minimal level of expenditure settled from the Company’s own resources – for example bank charges – would probably taint the dormant status.
- It did not engage in trading activity (for example, advertising or promotion as well as making sales or incurring expenses). There will be edge cases where judgement needs to be applied.
- Expenses paid by shareholders were purely of a recurring type such as filing fees and accountant fees necessary to maintain the company in its existence.
- Often, but not necessarily, dormant companies have no equity other than share capital.
Note that the definition of a trading company for accounting purposes differs from that used for tax purposes.
Can a dormant company hold assets which do not generate income
Companies holding assets such as investment properties seem not to be regarded by Companies House as dormant . The online form that Companies House provide to file dormant accounts allows for only two types of asset in a dormant company – cash, or unpaid share capital owned by the shareholders. Ultimately it is however a matter of judgement. If the investment property earns rent, clearly the company is not dormant.