Dormant company accounts and tax

Q: How does this work in an example?

Illustration only. Oak Ltd is formed with one £1 subscriber share, paid on formation. In its first year it does nothing except pay its confirmation statement fee. It is dormant for Companies House, it can claim audit exemption under section 480 because it has been dormant since formation, and it can file dormant accounts online or on form AA02. HMRC treats it as dormant. In its second year Oak Ltd opens a deposit account and earns £3 of interest. That receipt must be recorded, so the company is no longer dormant for Companies House and needs micro entity or small company accounts rather than dormant accounts. For HMRC the interest is income, so an accounting period begins, the company must notify HMRC within three months under section 55, and a Company Tax Return will be due.

Q: What mistakes do owners of dormant companies make?

Thinking dormant means nothing to file. Accounts and confirmation statements are always required, and every director must still verify their identity; see Companies House identity verification. Using AA02 after trading. A company that has traded needs full dormant accounts with comparatives. Leaving money in an interest bearing account. This ends dormancy for both purposes. Assuming HMRC dormancy covers VAT and PAYE. Each registration is dealt with separately. Keeping a company with no future. If the company will never be used, closing it may be simpler; see closing a limited company: tax. Company directors can protect the business against the cost of an HMRC check with tax investigation insurance, which pays up to £100,000 of accountant's fees with Solar Protect. Read how our cover works or get a quote.

A dormant company still has to file annual accounts and a confirmation statement at Companies House every year, on the normal deadlines and with the normal penalties. If it has had no significant accounting transactions it can file simple dormant accounts and usually claim audit exemption. HMRC uses a different test, and a company that HMRC treats as dormant does not have to file Company Tax Returns unless it receives a notice to deliver one.

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What does dormant mean for Companies House?

Section 1169 of the Companies Act 2006 says a company is dormant during any period in which it has no “significant accounting transaction”, meaning any transaction that section 386 requires to be entered in its accounting records. The only transactions that can be ignored are:

payment for shares taken by the subscribers to the memorandum on formation
fees paid to Companies House on a change of name, on reregistration as a different type of company, or for registering a confirmation statement
a late filing penalty under section 453

Anything else that must be recorded breaks dormancy for that period. In practice the usual culprits are a bank account that earns interest or incurs a charge, or a small expense paid for the company. The test is applied period by period, so a company can be dormant in one year and not the next.

What does dormant mean for Corporation Tax?

HMRC’s test is about trading and income rather than bookkeeping entries. GOV.UK says a company is usually dormant for Corporation Tax if it has stopped trading and has no other income, such as investments, or is a new company that has not started trading. Flat management companies, and unincorporated clubs owing less than £100 Corporation Tax, can also be treated as dormant. For this purpose HMRC counts buying, selling, renting property, advertising, employing someone or receiving interest as activity. HMRC’s COTAX Manual at COM1040 adds that a company existing only to hold chargeable assets can be treated as dormant if the assets are unlikely to produce profits, income or gains in the near future.

HMRC may write to say it will treat the company as dormant. If not, the company can tell HMRC itself. If HMRC has already issued a notice to deliver a Company Tax Return for a period, that return must still be filed online, showing the company as dormant. After that, no further returns are needed unless a new notice arrives. Corporation Tax itself is explained in Corporation Tax explained.

The two tests can give different answers. A company receiving a little bank interest is not dormant for either purpose. A company whose only transaction is its confirmation statement fee is dormant for Companies House and, if it has no trade or income, for HMRC too.

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What must a dormant company file at Companies House?

Every limited company must deliver accounts each year, trading or not, and must also file a confirmation statement (see the confirmation statement explained). Dormant accounts are much simpler than trading accounts. Companies House guidance says they do not need a profit and loss account or directors’ report, but must contain:

a balance sheet with a statement above the director’s signature and printed name that the company was dormant throughout the period
the previous year’s figures for comparison
certain notes to the balance sheet
the audit exemption statements: that the company was entitled to exemption under section 480, that members have not required an audit under section 476, and that the directors acknowledge their responsibilities for accounting records and preparing accounts
for a small private company, a statement that the accounts are prepared under the small companies regime

Dormant accounts can be filed online, for companies limited by shares or by guarantee, with built in checks. Paper form AA02 is only for a company that has been dormant since incorporation; it cannot be used by a company that became dormant after trading or by a dormant subsidiary. The deadlines and late filing penalties are exactly the same as for any other accounts; see Companies House accounts deadlines and late filing penalties. Companies House specifically warns that an appeal based on the company being dormant is unlikely to succeed.

When is a dormant company exempt from audit?

Under section 480, a company is exempt from audit for a financial year if it has been dormant since formation, or if it has been dormant since the end of the previous financial year and it is entitled to the small companies regime (or would be but for being a public company or a member of an ineligible group) and does not have to prepare group accounts. Section 481 removes the exemption from traded companies, banks, authorised insurers, electronic money issuers, MiFID investment firms, UCITS management companies and companies carrying on insurance market activity. Members can still require an audit under section 476. From 1 April 2028, a company claiming any audit exemption will need an enhanced directors’ statement on the balance sheet naming the exemption and confirming the company qualifies.

Can a dormant subsidiary avoid preparing or filing accounts?

Yes, if it is dormant throughout the year and its parent is established under the law of a part of the UK. It can claim exemption from preparing accounts under section 394A, or from filing them under section 448A. The parent delivers a package of three documents before the subsidiary’s accounts are due:

written notice that all the subsidiary’s members agree to the exemption for that year
form AA06, the parent’s statement guaranteeing the subsidiary under section 394C or 448C
the parent’s consolidated accounts and annual report, with the auditor’s report, naming the subsidiary and stating the exemption

The cost is real: the guarantee covers all the subsidiary’s liabilities outstanding at the year end until they are satisfied.

What happens when a dormant company starts trading?

Companies House does not need to be told; the next set of non dormant accounts shows the change. The company loses dormant audit exemption for the year it ceases to qualify and may need to prepare full accounts, although small company exemptions may still apply.

HMRC must be told. Section 55 of the Finance Act 2004 requires a company to give HMRC written notice of the start of any accounting period that does not immediately follow a previous one, no later than three months after it begins. If the company is VAT registered and does not intend to trade again, it must deregister within 30 days of becoming dormant; if it plans to restart, it must keep sending nil VAT returns. A PAYE scheme should be closed if the company will not restart in the current tax year.

How does this work in an example?

Illustration only. Oak Ltd is formed with one £1 subscriber share, paid on formation. In its first year it does nothing except pay its confirmation statement fee. It is dormant for Companies House, it can claim audit exemption under section 480 because it has been dormant since formation, and it can file dormant accounts online or on form AA02. HMRC treats it as dormant.

In its second year Oak Ltd opens a deposit account and earns £3 of interest. That receipt must be recorded, so the company is no longer dormant for Companies House and needs micro entity or small company accounts rather than dormant accounts. For HMRC the interest is income, so an accounting period begins, the company must notify HMRC within three months under section 55, and a Company Tax Return will be due.

What mistakes do owners of dormant companies make?

Thinking dormant means nothing to file. Accounts and confirmation statements are always required, and every director must still verify their identity; see Companies House identity verification.
Using AA02 after trading. A company that has traded needs full dormant accounts with comparatives.
Leaving money in an interest bearing account. This ends dormancy for both purposes.
Assuming HMRC dormancy covers VAT and PAYE. Each registration is dealt with separately.
Keeping a company with no future. If the company will never be used, closing it may be simpler; see closing a limited company: tax.

Company directors can protect the business against the cost of an HMRC check with tax investigation insurance, which pays up to £100,000 of accountant’s fees with Solar Protect. Read how our cover works or get a quote.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.