What is a dormant company for tax purposes?

Here is a comprehensive answer on what constitutes a dormant company for tax purposes.

What the law says

The statutory definition of a "dormant" company is found in Companies Act 2006 (CA06), s.1169. A company is dormant during any period in which it has no significant accounting transaction — meaning a transaction that is required by s.386 CA06 to be entered in the company's accounting records.

The following transactions are disregarded when determining dormancy:

• Taking of shares by a subscriber to the memorandum on formation;
• Payment of a fee to the registrar on a change of name or re-registration;
• A penalty under s.453 CA06 (failure to file accounts); and
• A fee to the registrar for registration of a confirmation statement.

For the purposes of the debt cap rules (TIOPA 2010), the definition of a dormant company is set out in TIOPA/S353, which cross-refers to CA06/S1169 (no significant transactions). A company incorporated outside the UK can similarly be dormant if it has no significant transactions in a period. However, a UK company is not dormant if transfer pricing adjustments are made for it under TIOPA10/S147(3) and (5).

HMRC guidance / practice

HMRC treats a company as dormant for Corporation Tax when it:

• Has stopped trading and has no other income (e.g. investments);
• Is a new limited company that hasn't started trading;
• Is an unincorporated association or club owing less than £100 Corporation Tax; or
• Is a flat management company.

As a relaxation, HMRC will treat a company that merely exists to hold chargeable assets as dormant, provided those assets are unlikely to produce any profits, income, or gains in the near future.

A UK-incorporated company will not be in the charge to Corporation Tax where it has been inactive since incorporation or is accepted by HMRC as dormant and nothing has happened to bring it into the charge to Corporation Tax.

Notification obligation: Section 55 Finance Act 2004 obliges dormant companies coming into the charge to Corporation Tax to notify HMRC. This applies only to incorporated companies, not to members' associations or clubs.

Transfer pricing: Where a dormant company has, for example, lent money to a group company or holds intangible property used by a connected business, transfer pricing rules would generally require the dormant company to receive or impute income — which could cause it to lose its dormant status. However, companies that were dormant at 1 April 2004 (or for the 3 months ending on that date) are exempt from transfer pricing requirements under TIOPA10/S165 for as long as they remain dormant. This exemption is permanently lost if the company becomes active after 1 April 2004.