How to avoid penalties for dormant companies

Reasons to be dormant

Most companies usually experience period at the start where there is no activity after formation. HMRC only expect a corporation tax form (CT) from the point at which your company becomes active. This principle applies when your company has ceased all activity and becomes dormant. If HMRC isn’t made aware that your company is dormant then they will expect a return to be submitted. Fines for not doing so can be up to £1,000.

Notify HMRC

HMRC assumes that a new company starts trading from day one, and that a company remains active until told otherwise. For recently formed companies, a Form CT41G needs to be submitted and completed to notify HMRC. Where your company has ceased activity, you’ll need to write to the tax office that handles your company’s CT. If the company starts, or restarts, an activity again then HMRC should be notified by submitting Form CT41G.

How to tell whether you are active?

A company must be inactive in order to qualify as dormant for tax purposes. HMRC manuals suggest that a company is inactive “if it has no significant accounting transactions” .

To achieve this status remember the following:-

1) Place any funds the company has in a non-interest producing account to avoid “significant accounting transactions”.

2) Your company can own substantial assets and still be classed as dormant providing that they don’t produce income. It is common to hold land or buildings linked to your business separately from the trading company.

3) Not having to submit a CT return will save time and accountants’ fees, but annual accounts must still be submitted to Companies House. The format for these accounts is shortened for dormant companies.