The Difference Between Dormant and Non-Trading Companies

The world of accountancy and tax-related matters can, unfortunately, be a complex minefield for businesses in the UK. 

At The Financial Management Centre, we appreciate this, where terms like ‘non-trading’ and ‘dormant’ makes wanting to deal with it an off-putting task. However, through our experience and services, we’re here to ease your accountancy concerns and provide direction towards making decisions that help your business thrive. 

Our most common questions surround the status of and trading capabilities of companies, specifically the difference between dormant and non-trading companies. Whether you’re unaware of what a dormant company is or you’re unsure whether your business should be classed as non-trading, here’s all you need to know. 

What is a Dormant Company?

A dormant company is a registered limited company, which although is recognised as a business, doesn’t perform any degree of activity or make money. Defined as ‘inactive’ by HMRC, funds do not flow through a dormant company, even if they have registered status. 

It’s very important to understand the difference between dormant and non-trading companies, as each incurs different tax liabilities. For a dormant business, those tax liabilities of corporation tax are non-existent. 

You may be questioning the point of intention of opting for dormant company status. 

And there are a range of reasons why companies register as ‘dormant’ or ‘inactive’, like reordering of an older company to the necessity of an inactive period due to sickness or leave. During that time, being dormant gives a business time to plan and relaunch the newer company. 

After all, who wants to pay tax on a company that’s completely inactive? 

The registration of a dormant company doesn’t have a cut-off period, meaning dormancy can remain as the trading status up until financial activity begins. 

Within that period, activities like employing staff, making and managing investments, buying and selling items, and making property commitments cannot be completed. 

Ultimately, all activities that include financial implications or benefits cannot be completed, and if this is violated, HMRC reserves the right to change the company’s status to active and apply the taxable liabilities subject to that of an active company. 

Under dormant status, tax returns will not be required but dormant accounts and returns will need to be filed at Companies House to maintain an inactive trading status. Without this, HMRC will assume the business is trading, and enforce tax liabilities. 

What is a Non-Trading Company?

A non-trading company is still considered inactive by HMRC for a short time, but may still experience transactions due to prior business arrangements or liabilities. 

While the activity may be sparse, oftentimes resembling those of dormant companies, non-trading companies, these businesses are required to remain active in the event of business activity or transactions. 

The status of a ‘non-trading’ company may be attached to a business that has previously traded, but has now paused its responsibilities or processes. Due to previous financial commitments, corporation tax will still need to be paid for active accounts from trading periods.
Once those liabilities have been completed, non-trading companies can remain under this status according to HMRC for up to 5 years, without the necessity of filing tax returns. 

If you’re currently a trading company, but hope to change to a non-trading company, it’s recommended that you fulfil all financial responsibilities prior to this, to ease your transition period.

The Difference Between Dormant Companies and Non-Trading Companies

Understandably, both dormant and non-trading companies appear similar due to their low or non-existent levels of activity.

However, the difference between dormant and non-trading companies focuses on attached regulations, where dormancy disallows any form of financial transaction, which isn’t the case for a non-trading business.

Differences also include tax commitments, and the reporting and filing requirements of both types of companies. Dormant businesses require dormant returns with Companies House, whereas a non-trading company requires communication and filing through HMRC.

An active company can either register as dormant or non-trading, all depending on their intentions moving forward and their needs when considering the flexibility of accounts and transactions.

This is a clear difference between dormant and non-trading companies, as each has differing benefits, suited for the requirements of the business. This is a key driving force when deciding between the dormant vs non-trading status.

Understanding Your Financial Obligations with The Financial Management Centre

We’re aware that the definitions and trading statuses can be overwhelming and difficult to understand. And therefore, deciding whether your business is better off as dormant or non-trading can be challenging. 

However, The Financial Management Centre is here to offer assistance and point you in the right direction towards managing your business’s financial affairs. 

Since, as a dormant company, your accounts will be inactive, transactions will come to a halt, even if you’ve previously traded. As a result, balancing the books won’t be necessary, but understanding tax liabilities and the next steps is essential. 

For a non-trading company, transactions can still occur, and it’s important to keep on top of these as if you were a trading company – which we can assist with. 

The difference between dormant companies and non-trading companies highlights activity capabilities, from a financial perspective, which we can run through with you. It all depends on the company’s needs and intentions moving forward. 

Through unprecedented times, it can be difficult to know the best way forward for your business, due to demands and the decline of activity in niche industries. 

We’re here to help you with the next steps, and will guide you through whether or not dormant or non-trading status would be better for your business. 

For more information on registering as dormant vs non-trading, contact our friendly team today.