I have many friends who run their own startups that ask me when they need to register with the HMRC to begin filing their taxes and when they need to file full set of accounts with Companies House. The answer to both of these questions depends on one thing: is your company dormant? The general idea is that your company is considered to be a “dormant company” if it has practically no business activity in it, hence you shouldn’t have to file as much information with the HMRC and Companies House as would be the case for an active company. However, you should note that the definition of a “dormant” company is different under HMRC vs Companies House rules.
Dormant Company under HMRC Rules
Under HMRC rules, essentially a dormant company is one that is not trading. A company begins to trade when it engages in any business activity such as a trade or profession, or starts to buy and sell goods or services to make a profit. Generally, the point in time when your business begins to trade is when it starts to earn any income. Before this, your company is not considered to be trading for Corporation Tax purposes. During this time, you can still carry out “pre-trading activities” or incur “pre-trading expenditures”. The good news is that the expenses incurred by your business within the past 7 years before you started to trade can be deductible for tax purposes in the first period when your company begins trading.
When your business is dormant or has not yet began to trade, you don’t need to register your business with HMRC as you have no income to pay taxes on.
Dormant Company under Companies House Rules
Companies House rules are a bit more stringent. Under Companies House rules, a company is considered as dormant if it has had no significant transactions in the financial year. Significant transactions exclude the following items:
- filing fees paid to Companies House
- penalties for late filing of accounts
- money paid for shares when the company was incorporated
When your business is dormant, you only have to file dormant accounts with Companies House, and it does not need to be audited. Dormant accounts are a short form of full set of accounts, where you only need to include a Balance Sheet and some notes.
Therefore, this means that your business is no longer considered to be dormant under Companies House rules when it engages in any transaction aside from the exception items listed above. For instance, if your business begins to earn any income and/or incurs any expenses that are not Companies House filing fees, penalties for late filing of accounts, or money paid for shares upon incorporation, then the company stops being a dormant company under Companies House rules.
What to Do When Your Business Begins Trading?
Now that you understand how to tell when your company becomes non-dormant or begins to trade, the next step is to know what you need to do when this happens.
With the HMRC, you will need to register your business for Corporation Tax within 3 months of your business beginning to trade (or starting to earn any income). You can contact HMRC by phone or post to register. The general inquiry phone number to contact HMRC at is: 0300 200 3410. Once you contact them, you should receive your company’s 10-digit Unique Taxpayer Reference (UTR) in the post at your business address. Then, you can use the UTR to register for Corporation Tax online.
You can become a dormant company again after your business was active previously if you stopped earning any income from your business. To become a dormant company, you simply need to notify the HMRC about this.
For Companies House filings, once you become non-dormant per Companies House rules, you will simply need to begin filing regular accounts rather than dormant accounts. I will provide templates for various types of accounts in the future, so stay tuned!