The Difference Between Dormant and Non-Trading Companies

The world of accountancy can, unfortunately, come across as complex for some companies.

At The Financial Management Centre  we appreciate this, where all the jargon, such as non-trading, where financial terms, such as dormant, and where accountancy processes can make registering a business, doing your accounts and maintaining financial liabilities off-putting.

However, through our experience and services, we’re here to ease your accountancy processes, along with providing direction towards making decisions, helping you thrive in business.

Questions we commonly get asked surround the status of and trading capabilities of companies. One area which has recently been highlighted is the difference between dormant and non-trading companies, down to the fact that many industries have been paused and where significant change has been experienced.

So, if you’re unaware of what a dormant company is, if you’re unsure whether your business should be classed as non-trading, or you lack awareness of HMRC definitions, 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, it doesn’t perform any degree of activity or make any money. Defined as inactive by HMRC, funds in fact do not run through a dormant company, from the offset, even while it’s registration may be completed.

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

You may question the point or intention of opting for a dormant company.

Yet, there are many reasons why companies register as dormant or inactive, from the reordering of an older company to the necessity of an inactive period down to sickness or leave, and to the time that being dormant offers between the planning and launch of a company.

After all, who wants to pay tax on a company which is completely inactive?

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

Within that period, activity such as employing staff, making investments, buying or selling items, and making property commitments cannot be completed.

Ultimately, all activity that includes financial implications or benefits cannot be completed by dormant companies, which if violated, can result in the activation of a trading company and the taxable liabilities that come with that status.

While tax returns will not be required, dormant accounts and returns will need to be filed at Companies House to maintain an inactive trading status. Without this, HMRC will believe that you’re trading, potentially resulting in tax liabilities.

What is a non-trading company?

A non-trading company is a company which although may be inactive for a proportion of time may still experience transactions, due to prior business arrangements or liabilities.

While the activity may be sparse, resembling those of dormant companies, non-trading companies are likely to require the open status, in the event of potential business activity or transactions.

The status of a non-trading company will usually be attached to a company that has previously traded, yet has now paused its responsibilities or processes, resulting in inactive movements.

However, down to previous financial commitments, corporation tax will need to be paid, for active accounts from trading periods.

Yet, once those liabilities have been completed, non-trading companies can remain under this status in conjunction with HMRC for up to 5 years, without the necessity of filing returns.

If you’re 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 and non-trading companies

Understandably, both dormant and non-trading companies seem 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 surround tax commitments, and the reporting and filing requirements of both types of companies, where dormancy requires dormant returns with Companies House, and where 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 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.

Knowing where you stand with the Financial Management Centre

As we’re aware, even definitions of trading statuses can be overwhelming to understand. Down to this, deciding whether your business is best off as dormant or non-trading can be challenging.

However, we at The Financial Management Centre are here to offer assistance, to point you in the right direction and to manage your accounts for you.

If you’re a dormant company, your accounts will be inactive, as transactions will come to a stop, even if you’ve previously traded. As a result balancing the books will not be necessary, however, understanding liabilities and also the next steps will be important.

For a non-trading company, as transactions can still be made, it is important to keep on top of them, as you would as a trading company, which we can assist with.

The difference between dormant and non-trading companies ultimately highlights activity capabilities, from a financial perspective, which we can run through with you.

All depending on your company’s needs and intentions moving forward, recommendations surrounding your activity capabilities will be made.

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

We can help you with your next steps, on whether dormancy or a non-trading status will be best for you right now.

For more information on the dormant vs non-trading topic, contact our team today. Know where you stand with your finances, with your capabilities and with your future responsibilities with TFMC.