How to Close a Dormant Company Without Penalties?

There are a lot of companies registered in the UK, but they have not started trading. Others just go out of business. These are referred to as dormant companies. Still, keeping a company in a dormant state on the register generates unnecessary work and risk. For this reason, it is important to know how to close a Dormant Company.

This is also referred to as company dissolution to eliminate the legal person. Closing a dormant company UK is generally easy in case the company is solvent. However, it is necessary to follow the appropriate company dissolution procedure of a company. This will help you avoid fines and even personal liability.

This is a detailed guide explaining the easiest way of dissolving a solvent in a non-trading company.

What is a Dormant Company?

Before exploring how to close a Dormant Company, it’s important to know what a dormant company is. The first thing is to know the status of your company. There are two versions of the dormancy of a company in the UK. One is Companies House, and the other is HMRC.

Dormant for Companies House

Companies House considers a company to be dormant when it has not made any significant transactions during the financial year.

Significant transactions exclude:

Fee to Companies House for statutory filing.
The fines are paid in case of failure to file accounts on time.
Subscribers bought shares paid for on incorporation.

Your company will not be considered dormant if it has received or incurred any other income or expenditure, even if it has ceased trading. Corporation Tax Dormancy (HMRC)

A company is usually dormant on Corporation Tax, which does not trade and has no other income. Examples are investments or interests. Also, when your company is put into dormancy with respect to tax, you should inform HMRC. This assists you in saving unnecessary taxation.

This involves registration of dormant accounts in addition to a Confirmation Statement to Companies House.

Why Close a Dormant Company?

You may question yourself, why close a dormant company UK? And, what is the harm in keeping it dormant when it is not trading?

Confirmation Statement should be submitted annually by the directors. They also have to file dormant accounts. In case you are sure you will never use the company again, it is just easier to close it. It eliminates any future liability and risks.

The best alternative to do this is to close a dormant company when you are certain that the company is no longer required. Voluntary strike-off is the most frequent and least difficult type of closure process.

The Most Common Closure Process Is A Voluntary Strike-Off

A voluntary strike-off is the simplest method of company dissolution procedure. This involves a request for a dormant company closure to the Companies House, asking it to take the name of the company off the register. This is accomplished in Section 1003 of the Companies Act 2006.

Voluntary Strike-Off Eligibility.

This fast-track close a dormant company process can not be used by every company. The firm has to satisfy stringent requirements to employ the strike-off process.

In the three months preceding the application, the company should not have had:

Bought or sold any business activity
Changed its company name
Sold any property or rights, other than those required to facilitate the strike-off.
No other business but strike-off preparation

Most importantly, the company should be solvent. It should be in a position to pay all its debts. In case it owes a debt or any liability, the application to have the strike-off will probably be dismissed or made pending.

How to Close a Dormant Company?

Overall, it is a straightforward process. This is particularly more so when it comes to companies that were never active at all, and their structure is simple.

1- Adjust All Financial and Tax Matters

You need to put the financial affairs of the company in order before taking action to strike off. This plays a significant role in the avoidance of penalties in dormant companies.

Pay All Debts: Clear all your debts, such as bank loans, credit cards and supplier bills.
Make Disposition of Assets: Any unsold assets, including money in the bank or property, should be withdrawn or distributed to shareholders. If there are assets remaining at the time the company is struck off, they transfer to the Crown (bona vacantia). It is difficult and expensive to reclaim these.
HMRC Clearance: Make sure that all the tax issues are completed. This also involves submitting a final Company Tax Return (where HMRC asks to do so).
Deregistration of VAT: In case the company was registered with VAT, you need to deregister with HMRC.
Close PAYE Scheme: In case the company has had a payroll (PAYE) scheme, terminate the scheme.
Close Bank Account: After all the transactions are over, close the bank account of the company.

2- Submit All Pending Documents

All the statutory filings should be updated. This is a pre-qualification for the successful company dissolution procedure.

Annual Accounts: Submit all annual accounts, including the terminating ones. They will be simplified dormant accounts of a company that is dormant.
Confirmation Statement: Make sure that the most recent Confirmation Statement has been filed.

Before filing a strike-off, you have to be in total compliance. Companies’ House is not going to process a closure in case of missing filings.

3- File the DS01 Form

This is the official procedure for seeking the strike-off.

Submit form DS01: This is the Application to Striking off a Company from the Register.
Signatures: The form should be signed by the majority of the company directors.
Application Fee: Pay the application fee to Companies House. The payment and application can be made online, which is usually quicker.
Submission: The signed form should be sent to the appropriate address of Companies House, or it can be submitted online.

4- Notify Interested Parties

This is a legal necessity under the Companies Act 2006. The non-compliance with this is a criminal offence. You are required to hand over a copy of the DS01 form to concerned individuals within a period of seven days after filing the same.

The list of concerned parties is as follows:

Every director and shareholder (member)
Creditors (bank, suppliers, HMRC)
All employees
The managers or trustees of any company pension scheme.

This is a notice period whereby they can object to the dissolution. You are supposed to record the time and manner in which you sent these notifications.

What are the Legal Considerations for Closing a Dormant Company?

The first legal option is a strike-off. But there is another approach, which might be required in case you have more substantial resources in your company.

Strike-Off vs. Members Voluntary Liquidation (MVL)

In the case of simple dormant companies, the most cost-effective and fastest one is the strike-off. But when the company has assets exceeding £25,000, another procedure referred to as Members’ Voluntary Liquidation (MVL) would be more tax efficient.

The appointment of an insolvency practitioner who is licensed is an MVL. This is an official winding-up procedure. It can enable shareholders to obtain the Entrepreneur Relief on distributions. You should always consult a professional tax advisor in case a dormant company has a substantial amount of assets.

Consequence of Non-Compliance

How to avoid penalties for dormant companies? The only way to prevent the penalties that face dormant companies is through compliance. In case you do not miss the statutory deadlines for the filing of the accounts or the Confirmation Statement, Companies House imposes the automatic late-filing penalties. Late filing penalties typically start from £150 and increase depending on how late the accounts are filed. They are applicable even in the case that the company is inactive.

When you seek a strike-off and do not inform the concerned authorities, then it becomes a criminal offence. This may lead to personal fines for the directors. This is also the same case with continuing to trade without filing the DS01 form.

Post-Application Process

When the DS01 form has been dealt with, a notice appears in The Gazette by Companies House. This is considered the official record. The intention to strike the company off the register is mentioned in the notice.

It also provides two months to creditors and other interested parties to object. Provided that no objections are made, another notice is given in The Gazette. The second notice proves that the company is officially dissolved and no longer exists as a legal entity.

The Bottom Line

The process to close a dormant company UK is not a hard task. The only difference is that it is well prepared and by the book. Voluntary strike-off is a cheap and cost-effective route. It is perfect for the majority of solvent-dormant firms.

Ensure that your company is solvent and can be struck off. Pay all financial and tax-related issues, such as settling all assets and debts. Make sure that all Companies House returns are up to date. Fill Form DS01 and send it with a proper fee.

Inform all the parties that are required by law within seven days of submission. Through this appropriate company dissolution procedure, you will be guaranteed an easy exit. In this way, you get rid of all future administrative requirements or penalties against late filing.