Ceasing to trade does not automatically end a company’s legal or tax obligations. Where funds remain in the business, directors and shareholders should carefully consider how those monies are extracted in the most tax-efficient way.
What Does ‘Dormant’ Mean?
The term dormant is interpreted differently by Companies House and HM Revenue & Customs (HMRC).
- Companies House regards a company as dormant if it has had no significant accounting transactions during the accounting period.
- HMRC, however, focuses on whether the company is actively carrying on a trade or business activity.
For HMRC purposes, a dormant company will generally have:
- No trading income;
- No business expenses, apart from minimal statutory costs such as Companies House filing fees.
Importantly, simply retaining cash in a bank account does not stop a company from being dormant. In many cases, those funds represent profits accumulated from earlier trading periods.
Filing Obligations Continue
Before a company becomes dormant, it must:
- Prepare and submit final statutory accounts; and
- File a final corporation tax return covering the period up to the cessation of trade.
HMRC should also be informed that trading has ceased, which can usually be done online or by telephone.
Any profits arising up to the cessation date remain subject to corporation tax. However, where losses arise in the final 12 months of trading, those losses may generally be carried back against profits of the preceding three years, potentially resulting in a corporation tax refund.
Once HMRC accepts the company as dormant, it will usually stop issuing corporation tax return notices.
Nevertheless, all limited companies — including dormant companies — must still file:
- Annual accounts; and
- A confirmation statement with Companies House each year.
Beware of Bank Interest
A common issue arises where the dormant company continues to earn interest on its bank account.
Although this may appear insignificant, bank interest is generally treated as non-trading loan relationship income and may:
- Create a corporation tax reporting obligation;
- Trigger a corporation tax liability; and
- Prevent the company from being fully dormant for tax purposes.
Failure to file the required returns can lead to automatic late filing penalties, even where no corporation tax is payable. HMRC may also reopen the company’s tax record and request backdated returns.
VAT and PAYE Registrations
Dormancy for corporation tax purposes does not automatically cancel:
- VAT registrations; or
- PAYE schemes.
These operate independently and should be formally deregistered where no longer required. In most cases, cancellations can now be completed online.
Extracting Remaining Funds Tax Efficiently
For many directors and shareholders, the key consideration is how to withdraw the remaining cash held within the company.
Leaving substantial funds sitting in a dormant company is rarely the most tax-efficient option.
Dividend Distributions
The most common extraction route is through dividends, provided the company has sufficient distributable reserves (post-tax retained profits).
Dividends are generally more tax-efficient than salary payments because they do not attract employer or employee National Insurance contributions.
Salary or Bonus Payments
Alternatively, remaining funds may be withdrawn as:
- Salary; or
- Director’s bonus.
However, this route is often less attractive due to:
- Income tax implications; and
- Potential National Insurance liabilities.
Strike-Off and Capital Treatment
A further option is to wind up the company through a formal strike-off process.
Where distributions are made before dissolution:
- HMRC will generally treat them as income distributions (dividends).
- However, where the total distribution to a shareholder does not exceed £25,000, the payment may qualify for capital treatment instead.
This can provide access to:
- Capital Gains Tax (CGT) rates; and
- Potentially Business Asset Disposal Relief where conditions are satisfied.
For 2026/27, eligible gains may be taxed at 18%under Business Asset Disposal Relief.
Where distributions exceed the £25,000 threshold, HMRC is more likely to treat the amounts as dividends, potentially resulting in higher income tax charges.
Disclaimer:
This newsletter is intended for general information purposes only and does not constitute tax, legal, or accounting advice. Businesses should seek professional advice before making any claims or decisions based on the information provided.
