Tax implications for a dormant company

Jennifer Adams looks at tax implications when a company ceases trading or becomes dormant but still holds cash in its bank account. Ceasing to trade does not automatically end a company’s legal or tax obligations, and where funds remain in the company, extracting them in a tax-efficient manner is often a key consideration for directors and shareholders.

What does ‘dormant’ mean?

Companies House and HMRC define dormancy differently. A company may be dormant for Companies House purposes while still having tax obligations. Companies House considers a company dormant if it has had no significant accounting transactions during the period, whereas HMRC’s definition focuses on whether the company is carrying on a trade or business.

For HMRC, dormancy generally means no income and no expenses beyond minimal statutory costs, such as Companies House filing fees. Importantly, holding cash in a bank account does not prevent a company from being dormant, but can simply reflect retained profits from earlier trading periods.

Submission of accounts and returns

Before becoming dormant, the company must file final accounts and a corporation tax return covering the period to cessation of trade. HMRC can be notified online or by phone of the cessation.
Any profits made to the cessation date remain subject to corporation tax (CT). If a loss was incurred in the final 12 months, that loss may generally be carried back against profits incurred during the accounting periods three years preceding, potentially generating a tax refund.

Once HMRC accepts dormant status, it will usually stop requiring submission of returns. Note that all limited companies, whether trading or not, must deliver annual accounts and a confirmation statement to Companies House each year.

Bank account interest

Care is needed if the company continues to receive bank interest, as this may count as taxable income  and prevent true dormancy for tax purposes. While this may seem trivial, such income is treated as ‘non-trading loan relationship’ income, meaning that the company has a live chargeable period, a reporting obligation, and a potential tax liability. Failure to file can lead to automatic penalties, even if no tax is due. HMRC may also reactivate the company’s tax record if it becomes aware of this income, potentially requiring backdated returns and triggering late filing penalties.

Other taxes

Dormancy for CT purposes does not automatically cancel VAT or PAYE registrations, as these operate separately. If no longer required, these registrations should be formally cancelled, which can now be undertaken online. Withdrawing the remaining cash The key issue is how the remaining funds are to be extracted. Leaving cash in a dormant company is rarely the most efficient strategy.

The most common route of withdrawal is to distribute funds as dividends if the company has sufficient distributable reserves (i.e., retained profits, after tax). The company could pay the remaining funds as salary or a bonus to directors; however, this route is usually less attractive because it potentially triggers National Insurance contributions. Alternatively, the company could be wound up formally through a members voluntary liquidation (‘strike-off’).

Distributions made in anticipation of a strike-off are usually treated as income. However, if the total distributed to a shareholder is £25,000 or less, HMRC may treat it as a capital distribution instead. This allows access to CGT rates and potentially business asset disposal relief, where eligible (18% for 2026/27). Above that threshold, HMRC is likely to view the distribution as a dividend, triggering income tax rather than capital gains tax.

Practical tip

If the company remains dormant (e.g., to retain its name) and its bank account is closed, any tax refunds cannot be deposited into a director’s personal bank account. To access the funds, the company will need to be restored, and a new bank account opened.

Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.