A Project On Dormant Company.docx

A Project On Dormant Company

Name : Reshmi Dutta

Branch : BA.LLB

Section : A

Roll No : 1683065

Semester : 5th

Subject : Company Law-I

Subject Code : LW-3011

SCHOOL OF LAW , KIIT UNIVERSITY

INTRODUCTION

A dormant company is one that has been registered with Companies House but is not carrying on any kind of business activity or receiving any form of income. Therefore, HMRC considers it dormant (or inactive) for corporation tax purposes. It can be dormant from the date of its incorporation, or it can become dormant after a period of activity. There are many reasons why a company may be dormant – to reserve a company name whilst preparing to launch the business; restructuring a previously active business; or an owner requires an extended period of time off due to illness, maternity leave, travel, a sabbatical, or any other reason. It can remain dormant for any length of time, but you must inform your local corporation tax office as soon as possible and maintain a number of statutory obligations for Companies House, including filing annual returns and dormant accounts, reporting changes to registered company details, and keeping records up-to-date and available for public inspection.

1. Section 455 of Companies Act , 2013 - Dormant Company (1) Where a company is formed and registered under this act for a future project or to hold an asset or intellectual property and has no significant accounting transaction , such a company or an inactive company may make an application to the registrar in such manner as may be prescribed for obtaining the status of a dormant company.

Explanation:

(i) “Inactive company” means a company which has not been carrying on any business or operation , or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years;

(ii) “Significant Accounting Transaction” means any transaction other than -

A) Payment of fees by a company to the registrar B) Payments made by it to fulfil the requirements of this act or any other law C) Allotment of shares to fulfil the requirements of this act ; and D) Payments for maintenance of its ofiice and records

(2) The registrar on consideration of the application allow the status of a dormant company to the applicant and issue a certificate in such form as may be prescribed to that effect. (3) The registrar shall maintain a register of the dormant companies in such form as may be prescribed. (4) In case of a company which has not filed financial statements or annual returns for two financial years consecutively, the registrar shall issue a notice to that company and enter the name of such company in the register maintained for dormant companies. (5) A dormant company shall have such minimum number of directors, file such documents and pay such annual fee as may be prescribed to the registrar to retain its dormant status in the register and may become an active company on an application made in this behalf accompanied by such documents and fee as may be prescribed. (6) The registrar shall strike off the name of a company from the register of dormant companies, which has failed to comply with the requirements of this section .

2. How to make a company dormant ?

To register a new company as dormant or change the trading status from active to dormant, you must contact your local corporation tax office in writing, stating the date from which it has been or will be dormant. You can find these contact details on any official letter from HMRC that has been delivered to your registered office address. Alternatively, you can locate your nearest tax office. Within approximately 15 days, you should receive notification at the registered office address that states acceptance of this dormant status.

If your company was previously trading, HMRC will send a ‘Notice to deliver a Company Tax Return’ after you have contacted your local corporation tax office. This must be completed for the corporation tax accounting period prior to it becoming dormant. It must be delivered to HMRC online. You will have to pay any corporation tax that it owes if it made a profit during that time. You should also close down your payroll and cancel your VAT registration, if applicable.

Before declaring your company as dormant, you should ensure all outstanding bills have been paid, including directors’ salaries, employees’ wages, shareholders’ dividends, direct debits for service providers, and all accounts with suppliers. If it is owed any money from clients, you should arrange to have these accounts settled. Upon satisfying all the above, you should not have to contact HMRC again until it begins trading.

3. Can a dormant company trade ? It cannot carry on any kind of trading activity or receive any form of income, which includes:  Buying and selling goods and services  Leasing or buying property  Employing staff  Paying directors’ salaries  Managing investments and receiving dividend payments  Issuing dividends to shareholders

 Earning interest or paying bank charges  Paying legal or accountancy fees from the business bank account A dormant company that carries on any such activities will forfeit its dormant trading status and be required to prepare full statutory accounts.

4. Dormant company reporting and filing requirements  Requirements for Companies Houses Dormant companies are required to prepare dormant accounts and a confirmation statements for Companies House every year. The accounts consist of a balance sheet and any relevant notes. You can deliver this information to Companies House by post or online using form AA02. The deadline for filing accounts is 9 months after the end of the financial year, which is known as the ‘accounting reference date’. However, if you are filing your company’s first accounts and they cover a period of more than 12 months, the deadline will be 21 months of the date of incorporation. Companies House will notify you of these filing dates in plenty of time. The annual confirmation statements, which was previously known as the ‘annual return’ is a document that outlines key company details at a certain date, including:  Company name.  Registered office address.  SAIL address (if applicable).  Directors’ details.  Secretary details (if one is appointed).  Shareholders’ details.  Location of statutory company records.  Information about issued shares.  Nature of business activities (SIC codes)  Information about people with significant control (PSCs) A company’s first confirmation statement must be delivered 12 months after the date of incorporation. Subsequent statements are due 12 months after the date of the previous statement. There is no limit to the number or frequency of statements filed each year. The purpose is simply to confirm important details to ensure the public register remains accurate and up-to-date. Dormant companies must also ensure statutory records are kept up-to-date and made available for public inspection at the registered office or SAIL address. Any changes to the registered details of a company must be reported to Companies House as soon as possible. The public record will be updated accordingly.

 Requirements for HMRC Dormant companies are required to file a Company Tax Return with HMRC if they were previously trading before becoming dormant. Companies that are dormant from the date of incorporation do not have to file any tax returns until they become active. After informing your local corporation tax office that it has ceased trading, you should receive a ‘Notice to deliver a Company Tax Return’. This must be completed to cover the period of activity before your company became dormant and to work out the amount of corporation tax your company owes, if any. Other than this tax return, a dormant company should have no further obligation to contact HMRC until it begins trading or the company is dissolved.

5. Does a dormant company have to pay any tax? No, dormant companies do not have to pay any tax until they become active. However, if a dormant company was previously trading, it must pay any outstanding tax liabilities to HMRC from that period of activity.

6. Can a dormant company be a guarantor of another limited company? A dormant company can be set up as limited by shares or limited by guarantee for the sole purpose of acting as a guarantor of another company and agreeing to contribute a sum of money towards its debts in the event of insolvency. However, to maintain its dormant status, a corporate guarantor must not have any ‘significant accounting transactions’ going through its accounts at any time. If you set up a dormant company to simply act as a guarantor of another company, there shouldn’t be any need for you to put any transactions through the accounts, for example:  If you register a dormant company limited by shares, the value of the shares can be set to match the amount you have guaranteed to contribute toward the other company’s debts.  If you register a dormant company limited by guarantee, the pre-determined sum of the guarantee can be set to match the amount you guarantee to contribute toward the other company’s debts. The payment of shares and guarantees will not be classed as a significant accounting transaction, because these fixed sums of capital are in place when your dormant company is incorporated. However, if it receives any kind of payment for its role as a guarantor, or if the directors or members (shareholders or guarantors) of the dormant company receive any income, the company will no longer be considered dormant.

CONCLUSION Legal and tax commentators have criticized the lack of adequate regulation of dormant companies in Nigeria. In addition to their existence being a loss of revenue to the government, it is argued that they deprive other entrepreneurs the opportunity to utilize the business names of such dormant companies particularly where the shareholders of the dormant company have abandoned any intention of continuing to carry on business under such a name in the future.

The minimum legal and tax requirements for all corporations in Nigeria, whether dormant or not, are higher when compared to jurisdiction like the United Kingdom where the reporting requirements for a dormant company are enumerated in the UK Companies Act, and are minimal. Present attempts to amend the provisions of CAMA will do well to recognize the short-term benefits on the one hand or disadvantages on the other that a dormant company may have to the Nigerian economy, and regulate its practice accordingly.

Until CAMA and CITA legislation are amended, dormant companies in Nigerian will be advised to comply with the existing statutory requirements. Subscribe & Unsubscribe to Legal Alerts This Alert and others produced by us are provided without any charge to you. You can always subscribe to it, on behalf of other interested persons from whom you have their permission, by sending to us a one line e-mail with the words "Subscribe – Legal Alerts" followed by the desired email address.

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