Difference Between Dormant and Non-Trading Companies

15th November 2021

Knowing the difference between dormant and non-trading companies is important in the world of business, as there could be tax implications if the correct protocol isn’t followed. 

You may think that dormant and non-trading companies are there same, but there are important differences between the two. 

Keep reading to learn more about what a dormant company is, what a non-trading company is, and to find out the key differences between the two. 

What Is A Dormant Company?

A dormant company is registered as a limited company. However, despite being recognised as a business, it is dormant which means that it performs no business or even activity, and makes no money. 

HMRC defines a dormant company as being inactive, so funds don’t travel throughout the company in any form - money doesn’t go in or out of the business. 

As no funds go in or out of a dormant company, you won’t have to worry about corporation tax

If your business is dormant, you’ll be glad to know that there are several benefits to registering as a dormant company.

Whether you’re reordering an older company or the company is dormant due to leave or sickness, it’s important to register as dormant if this is the case. 

There’s no deadline for registering as a dormant company - and your business can be registered as dormant for as long as it is dormant - right up until activity restarts within the business. 

However, while the business is registered as dormant, there can be no activity within the business. Activity counts as making investments, trading, buying items, and even hiring staff. 

Any activity that involves money, the exchange of money, or the acquiring of business funds can not be conducted while the business remains registered as dormant. 

Conducting any activity that involves anything financial within the business can result in the company being activated, which can have tax implications. 

If you’ve registered as dormant, you won’t have to worry about tax returns as they don’t need to be completed. 

However, dormant accounts and returns are required to be filed at Companies House (the UK registrar of companies) in order to maintain the status as a dormant company. 

Failing to do so can result in the business being viewed as active through the eyes of HMRC - which will result in certain tax liabilities.

What Is A Non-Trading Company?

Unlike a dormant company, a non-trading company may still conduct certain financial activities despite being inactive for a period of time. 

Certain transactions may still be conducted due to business arrangements and liabilities that were arranged before the company ceased trading. 

However, a non-trading company largely resembles a dormant company - the key difference is that the financial activity is sparse rather than non-existent. 

Non-trading companies will often require an open status, which is necessary if there is any activity within the business or any financial transactions. 

A non-trading company often has a status attached to a company that previously traded but has put a pause on all activities. This includes all processes and responsibilities, leaving the company temporarily inactive. 

As non-trading companies often have an open status, you’ll still be required to pay corporation tax when there is financial activity and for any active accounts and trading periods.

A non-trading company can hold its status for up to five years without paying tax returns once all business has been completed, and tax returns won’t need to be filed as long as the account isn’t open. 

It’s best to complete all business and financial responsibilities before registering for non-trading status, so you can ease the transition period and not have to worry about tax obligations. 

The Key Differences 

Although dormant companies and non-trading companies share many similarities, there’s a key difference between the two. 

Dormant companies will conduct no activity, whereas non-trading companies may still have small amounts of activity within the business (e.g loose ends that need tying up). 

The difference related to tax commitments - dormant companies aren’t required to complete tax returns but will need to complete dormant returns with the Companies house. Non-trading companies will still need to file through HMRC. 

The status of the company depends on their intentions in the future, including any financial requirements and transactions. 

For more information on corporation tax and how LJS can help you, click here.

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