GOV.UK Construction Industry Scheme (CIS) Explained
By the Construction Industry Scheme (CIS), contractors deduct 20% from registered and 30% from unregistered subcontractors as advance tax payments.
Key Highlights
- Is your company active? You can switch it to dormant status if it hasn’t been trading since the last tax year.
- With fewer filing requirements and no corporation tax liability, a dormant company saves you time and money while protecting interests, such as your business name and any other intellectual property.
What Is a Dormant Company?
A dormant company is a company that is incorporated at Companies House but is not trading or receiving any income from trading. This means it is not buying or selling goods or services, earning interest, managing investments, or operational activities.
HMRC regards inactive, non-trading companies as dormant for income tax. A company can become dormant from the date of incorporation or after a period of trading activity so long as it was not trading for the whole previous tax year.
Illustration
Meet Janet, a 32-year-old entrepreneur who was running a successful online boutique. However, as her family and career demands grew, she found it challenging to devote enough time to her business. Rather than shutting it down completely, Janet decided to make her company dormant, saving her a significant amount of money and simplifying her compliance with legal regulations.
Navigating the complex legal processes and understanding compliance requirements felt overwhelming at first, but she came across some legal advice that helped her break down the process into manageable steps:
- Cease trading activities: Janet stopped all sales and business operations. This meant halting all orders and customer transactions, ensuring no new financial activities existed.
- Settle outstanding liabilities: She paid off all outstanding bills, invoices, and debts, preventing any lingering financial transactions that could affect her capacity to remain dormant indefinitely.
- Close business bank accounts: Janet closed her bank account to avoid minor charges, such as maintenance fees, which could be recorded as transactions and complicate her dormancy.
- Notify HMRC and Companies House: Janet informed the tax authority that her company would be dormant for income tax purposes, which meant she no longer had to file income returns. She also continued to file confirmation statements (previously annual returns) and dormant company accounts (DCA) with the Registrar, which was much simpler than the full accounts required for active companies.
By making her company legally inactive, Janet was able to save money in several key ways:
- Reduced administrative costs: With no need to file company income returns, Janet’s accounting fees dropped significantly. The process of managing dormant accounts was much simpler and cheaper.
- Lower compliance costs: By avoiding the requirements for active trading companies, Janet reduced her overall compliance costs, saving time and money.
- Avoided unnecessary fees: Closing the business bank account meant Janet avoided monthly fees and potential transaction costs, ensuring no unexpected charges that could compromise her company’s dormant status.
By following these steps, Janet could maintain compliance with statutory requirements while reducing her financial burden. This approach also kept the option open for her to resume operations in the future without the ongoing costs of an active business. For those in a similar situation, making your company inactive can be a strategic way to save money and stay compliant.
See also: Find & Update Company Info on Companies House Search GOV.UK
What is the difference between a dormant limited company and a non-trading company?
A company that was previously trading has two options: either dormant or non-trading. The key differences between these statuses are as follows:
- Dormant business: equired to close its bank accounts and must not have any income or expense transactions.
- Non Trading Company: May have transactions and must file corporation tax.
| Aspect | Dormant | Non Trading |
|---|---|---|
| Definition | A company is considered dormant if it has never traded or had no trading activities in the previous financial year. | Any organisation, such as a club, run exclusively for its members’ benefit or tax liability, is not expected to exceed £100.
It also applies to previously active companies with residual financial activities. |
| Eligibility | Any company can inform HMRC that it is dormant, provided it does not carry out any trading activity or have any financial transactions. | Any active entity not engaged in trading activities, even though it may still have some financial transactions/income such as investment or asset management income such as a flat management company. |
| Companies House’s and HM Revenue Filing Requirements | No requirement to file corporation tax returns. However, simplified dormant annual accounts and confirmation statements must be filed annually with the Registrar. | The company must file regular company accounts and confirmation annual statements with the Registrar. The entity must also file company tax filings with the revenue authority. However, it can go for 5 years without filing returns without losing its status. |
| Bank Account | Must close all business-related bank accounts | May keep accounts for limited transactions |
What is the definition of “dormant” according to Companies House?
By definition, a dormant/inactive company is not trading, meaning it does not receive any form of income throughout its previous accounting period.
Here are the key activities that constitute trading —
- Buying or selling goods or services
- Receiving income from property leasing or buying
- Incur significant expenses, such as:
- Employing members of staff
- Paying directors’ salaries
- Receiving dividend payments
- Issuing shareholder dividends
- Earning interest on or paying bank charges
- Using the business-related bank account to pay accounting or legal fees
The presence of any of these activities means that your company will no longer be qualified for dormant/inactive status. However, certain transactions and activities are disregarded and can be carried out by a dormant company, including:
- Companies House fees include payments for filing a confirmation annual statement or late filing penalties.
- Payment for shares by the initial subscribers of the company, usually a nominal amount, often as little as £1 per share.
Warning
A dormant company cannot maintain a bank account since even minor transactions, such as bank charges or small deposits, can be recorded as business activities, causing them to cease to be dormant. However, you must adhere to filing requirements even if your limited company is dormant.
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How do you register your company to reserve a company name using dormant company status?
To set up a dormant company with the intention of preserving a limited business name is straightforward if you follow these steps:
- Choose an appropriate name: Use a company name check tool to ensure your desired name is available and appropriate.
- Obtain a registered service address: Secure a registered office and director service address for official correspondence.
- Get registered with Companies House: Complete the registration process with the Registrar of Companies using the standard industrial classification (SIC) code 99999 for companies that have been dormant since their incorporation.
- Make your company dormant: Register a dormant company and immediately inform HMRC that your company is dormant for company tax purposes. This will help you maintain the brand name without active trading.
How do I tell HMRC online that my company is dormant for corporation tax?
To tell HM Revenue and Customs your company is initiative for business income tax, follow the steps below —
- Go to GOV.UK and scroll down until you find the ‘Start Now’ button: https://www.gov.uk/tell-hmrc-your-company-is-dormant-for-corporation-tax
- Click on ‘Start Now’ to begin the process.
- Sign in using your Government Gateway ID and password, or enter your email address for a confirmation code.
- Provide the following required information:
- Your company’s name
- Your company’s 10-digit Unique Taxpayer Reference (UTR)
- The date your company stopped trading (if it began trading)
- Submit the form to inform HMRC that your company is dormant.
Insight
Once you let HMRC know about your dormant status for income tax, you usually don’t need to file a company tax return, so your company can remain dormant unless they ask you to. If you don’t plan to trade again, deregister for VAT within 30 days. If you want to keep your VAT registration, submit nil VAT returns for the period while your company is dormant. When you start trading again, remember to inform HMRC that your company is active within three months of starting up.
See also: How Shelf Companies Lost Their Appeal and What to Do Now
How do I notify Companies House that my company is dormant for company tax?
As stated above, your company will be deemed dormant if it has had no significant accounting transactions (any transaction required to be recorded into company accounts) during the fiscal year.
Follow the steps below to inform the Registrar of Companies that your company is inactive —
- Ensure your company has no significant accounting transactions in the previous financial year.
- File your confirmation statement and dormant accounts, which serve the purpose of informing the Registrar that your company is now dormant.
Illustration
Remember Janet, who ran an online boutique? Her SIC code was 47910. After deciding to make her company inactive and following the steps outlined earlier, she now needs to inform the Registrar. Here’s how she did it:
- File a confirmation statement: In her confirmation statement, Janet changed her SIC code to 99999, which indicates a dormant/inactive status.
- Submit dormant accounts to Companies House: Next, she filed her company accounts, which ensured that they were aware of her company’s inactive status and that she remained compliant with legal requirements.
Unlike with HMRC, there is no explicit way to inform the Registrar when a company becomes dormant or has become active after a period of dormancy other than by filing the relevant paperwork with the updated status.
How do I prepare and file dormant company accounts with Companies House?
To file your DCA with the company registrar, complete and submit Form AA02 (DCA). To prepare dormant accounts, you need to provide basic company details, which will include the following:
- Company name and registration number
- Date of balance sheet, which is also your accounting year-end date
- Accounts details, which include –
-
- Called up share capital not paid: Specify the amount shareholders have not unpaid for shares issued.
- Cash at bank and in hand: This section requires you to specify the funds in bank accounts or physical cash. The Registrar seeks a comprehensive understanding of your financial affairs even as you transition to or maintain.
A snapshot of Dormant Company Accounts Form AA02
- Net assets: Refer to the total value of the called-up shares and any cash held in hand or bank accounts.
- Number of shares: State the total number of shares issued by the company.
- Class of shares: Specify the type or class of shares issued (e.g., ordinary shares, preference shares).
- Shareholders’ fund: This represents the company’s total value of shareholders’ equity. For example, if the company issued 10 ordinary shares at £1 each, the shareholders’ fund would be £10 (£1 × 10 shares).
- Audit Exemption Statement: This statement indicates that your company qualifies for exemption from audit under Section 480 of the Companies Act 2006. Inactive companies typically qualify for this exemption because they do not engage in significant financial transactions that would necessitate an audit.
- Director statements: Affirming that the shareholders (members) of the company have not requested an audit of the company’s financial accounts for the specific reporting period. The statement also acknowledges their legal responsibilities under company law (such as the Companies Act in the UK).
- Date of approval of accounts: The specific date on which company directors formally endorse and finalise the financial statements for submission to the official Registrar and marking the completion of the financial reporting process.
- Presenter information: The details of the individual or individuals responsible for preparing and submitting the document.
-
Insight
Your company may own assets that do not need to be reflected in its accounts, provided there are no associated operational costs or income from managing or maintaining those assets.
You can use Companies House WebFiling or submit your form by post, addressing them to the Registrar of Companies, Companies House —
For companies registered in England and Wales:
- Crown Way, Cardiff, Wales, CF14 3UZ.
- DX 33050 Cardiff.
For companies registered in Scotland:
- Fourth floor, Edinburgh Quay 2,
- 139 Fountainbridge, Edinburgh, Scotland, EH3 9FF.
- DX ED235 Edinburgh 1 or LP – 4 Edinburgh 2 (Legal Post).
For companies registered in Northern Ireland:
- Second Floor, The Linenhall, 32-38 Linenhall Street
- Belfast, Northern Ireland,
- BT2 8BG. DX 481 N.R. Belfast 1.
How can a dormant company help save costs?
Dormant status offers companies substantial advantages in cost management and strategic flexibility, as shown below —
- Brand protection: By securing a brand name or trademark early, inactive companies prevent competitors from trading under the same name until entire operations begin, reducing potential legal and branding costs.
- Restructuring Preparation: Dormant status allows businesses to prepare for restructuring without active trading obligations, saving on operational expenses while strategically organising different parts of the business under a secured company name.
- Intellectual property management: Inactive companies effectively hold intellectual property and company assets, preserving ownership rights without incurring ongoing operational costs until business activities resume.
- Managing business transitions: During transition periods, such as terminal illness or changes in ownership, dormant status provides a cost-effective pause, allowing businesses to manage decisions and resources without the financial burdens of active operations.
These benefits highlight how dormant/inactive status can be a prudent financial strategy for businesses looking to conserve resources while maintaining strategic readiness.
Can a dormant company resume trading?
Yes, a dormant company can start trading again at any time without needing to notify Companies House directly. However, it must inform HMRC that trading activities have resumed. If the company has never traded before, it might not have a company UTR number and will need to register for corporation tax. The company will also need to submit tax returns and pay any applicable tax. Companies House will recognise that the company is active when you file the next confirmation statement, update the SIC code, and submit the statutory accounts.
Can you transfer all your assets into a dormant company to protect them? Such as your house, car gold and silver, anything of value
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