About 300,000 companies in the UK were classified as inactive in August 2009 according to Companies House statistics - that's almost 12% out of a total 2.6 million. Yet to remain on the register, these companies must still file annual accounts and returns otherwise Companies House will eventually strike them off.
Why are there so many dormant companies when the filing obligations are so onerous? The usual answer is that they are required for legal or commercial reasons even though they are not trading. A large proportion of them are flat management companies or investment holding companies. The sole reason for their existence is to own a fixed asset, usually the head lease or freehold of a property. Other companies own no assets at all and have never traded. These are likely to have been formed to protect a company name in anticipation of a future trade or some other commercial purpose. Once a company has been registered no other company is allowed to use the same name, so this can forestall competitors and others who may seek to mimic your trading identity. It can be a useful ploy if you have plans to incorporate an existing sole trader or partnership business at some point in the future. The other main category is those companies that simply do not trade any more. The owners may be in the process of dissolving them or they may wish to keep the company dormant in case it ever starts trading again.
What is a dormant company? It is one that has had no significant accounting transactions during the financial year. It should be noted here that dormant is not necessarily the same as non-trading. A non-trading company may still have significant accounting transactions, such as payment of debtors or creditors. For a company to have no significant accounting transactions it means that there must be no entries in its accounting records. The only exceptions are payments for shares and certain Companies House fees and penalties.
A dormant company only has to file an abbreviated Balance Sheet and a few notes, such as accounting policies, share capital, fixed assets, details of indebtedness (such as bank loans or trade creditors), details of any subsidiaries and details of any related party transactions such as participator loans. You also need to show comparative figures for the previous financial year. This last requirement makes it expedient to ensure that all residual balances in the accounts are closed out before the company becomes dormant. Amounts owing to or from debtors and creditors, including taxes, should be settled before the end of the last non-dormant financial period, fixed assets and stock should be written down to their net realisable value and bank accounts should be closed, as you will not then be able to file dormant accounts at all if there is any interest or bank charges in the next financial period. It may be a good idea to extend the financial year end for a few months to ensure that all of this can be done before the accounts are filed and that no further accounting transactions arise in the future.
Assuming that you can file accounts completely unchanged since the previous year (including comparative figures) you may be able to use Companies House Form DCA. This is a pro-forma balance sheet containing all the required statements but with the bare minimum of financial data. All you need to do is enter the company name, number and financial year end, the figures for share capital, net assets and shareholders funds and sign it. This is normally only applicable to companies that have never traded but can also be used for other dormant companies provided you have no fixed assets, debtors, creditors or reserves. However, it is probably just as easy to re-print your accounts for the previous year and change the dates.