How To Close a Dormant Company?

May 16, 2023 / Business Insolvency

Closing down a company is something most directors will need to consider at one point or another. This could be for reasons of financial distress, such as in cases of insolvency, but this is not always the reason for closing. Oftentimes, directors will consider closing their company to pursue other ventures, or to retire comfortably. Depending on a company’s position and its directors’ wishes, a certain approach will be needed.

While this is the case for active companies, some directors are unsure if this applies to their dormant companies, and if there are special closing methods. In this article, Clarke Bell will discuss the process of closing down a dormant company, covering the options for both solvent and insolvent companies, and what the methods can offer.

What is a dormant company?

A dormant company is exactly that – a company that does not actively trade, nor does it have any “significant accounting transactions”. Essentially, if a company does not have any ongoing commercial transactions, nor does it seek to generate revenue through other means, it is considered to be dormant. This means that although it is not pursuing any company activities, the company is still on the Companies House register, keeping its status as a legal entity. In order for a company to be considered dormant, the directors must first cease trading actively, then submit an application to HMRC to change the status of the company.

Although a dormant company does not require the same amount of work as an active one, directors will still have to submit annual company accounts. If you have no intention of bringing your company out of its dormant state, it only makes sense to wind it up for good, removing this obligation from your shoulders.

Closing a solvent dormant company

Your options for closing a dormant company depend on its financial state, namely whether it is solvent or insolvent. If your dormant company is solvent, you have two main options to consider: Members’ Voluntary Liquidation (MVL) and company dissolution.

Closing a dormant company using a Members’ Voluntary Liquidation

An MVL is one option for closing solvent companies, dormant or otherwise. It can be undertaken voluntarily, and is initiated by a company’s directors once the approval of the board has been obtained. An insolvency practitioner of the directors’ choice can then be appointed to enact the procedure. Once a licensed insolvency practitioner has been appointed, liquidation can begin in earnest. The insolvency practitioner will identify the company’s assets, ensuring an accurate appraisal of value can be obtained. Then, they will dispose of said company assets, distributing the proceeds amongst the company’s shareholders, assuming any and all liabilities have been covered already. Once all of the company’s retained profits have been realised and distributed, the company will be wound up and removed from the Companies House register. At this point, it will cease to exist as a commercial entity.

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Members’ Voluntary Liquidations are an excellent method of closing a company with large reserves of retained profits. This is because, unlike its competitors, the MVL process affords directors substantial tax benefits. It does this in two ways; firstly, retained profits are paid out to directors as capital distributions, meaning they will be taxed under Capital Gains Tax rates. Alternative methods, such as company dissolution, will see profits taxed under Income Tax rates, which are considerably higher. Secondly, the MVL procedure entitles directors to apply for Business Asset Disposal Relief, formerly known as Entrepreneurs’ Relief. If eligible, directors can reduce their tax rates on profits to a mere 10%, though Business Asset Disposal Relief can only apply to a lifetime limit of £1 million. If you are unsure whether you qualify for Business Asset Disposal Relief, or have questions about how it works, read our complete guide to the process.

Closing a dormant company using company dissolution

A strong alternative to the MVL procedure is company dissolution, one that is an excellent solution for companies with little in the way of retained profits. Also known as a company strike-off, dissolution is another voluntary procedure that directors of solvent companies can use to close down. It can be initiated by submitting a DS01 form to Companies House, either in paper format, or through their online portal. This will cost £10 or £8, respectively, making company dissolution an exceedingly cheap method of closing a company. For companies with small reserves of retained profits, this is a significant advantage indeed.

To be eligible for company dissolution, you must ensure that your company has not traded in the three months prior to your application. Your company must also not have any legal action pending against it, nor have outstanding debts or liabilities. Moreover, you should ensure that you dispose of or transfer all assets owned by your company, and empty all of its accounts, before the company is dissolved. Failing to do so will see these assets and accounts classified as “bona vacantia”, or without an owner. Ownership of any remaining assets will be transferred to the Crown.

Closing an insolvent dormant company using a Creditors’ Voluntary Liquidation

If your dormant is insolvent, meaning it cannot repay its debts and liabilities within a twelve-month period, one of your best options is to place it into Creditors’ Voluntary Liquidation (CVL). Directors can appoint an insolvency practitioner of their choosing to the position of liquidator, rather than have one be appointed on their behalf. This insolvency practitioner will identify company assets and dispose of them as they would under an MVL, but the proceeds will be distributed amongst creditors first. Any remaining funds will then be distributed amongst shareholders, though this is seldom the case. By opting for a CVL, directors will demonstrate a willingness to uphold their obligations to creditors, sheltering them from accusations of misconduct. A CVL also offers a series of other notable benefits, which you can read more about in our complete guide to the process.

Clarke Bell can help

If you are considering how to close your dormant company, let Clarke Bell be there to help. We have more than 28 years of experience in helping companies find the best methods of closing, and we can do the same for you. Don’t hesitate to contact us today for a free, no-obligation consultation and find out exactly what we can do for you.