Dormant or inactive: what's the difference?
A company is dormant under section 365 of the Companies Act 2014 only if it has no transactions that must be recorded in its accounting records during the year, and its only assets and liabilities are shares in, or balances with, other group companies. An inactive or non-trading company that holds cash, loans or property isn't dormant in this sense, and uses the small company audit exemption instead. Both lose their exemption under the same late filing rule.
The section 365 test
A company is dormant in a financial year if both are true:
- No significant accounting transactions: nothing that sections 281 and 282 of the Act require to be entered in its accounting records.
- Only permitted assets and liabilities: investments in shares of, and amounts due to or from, other group undertakings.
Some transactions are ignored: shares taken by the founding subscribers, and fees paid to the CRO for a change of name, re-registration or an annual return. To claim the dormant company audit exemption, the directors must also form the opinion that the company qualifies and record their decision in the minutes.
Inactive or non-trading companies
Many companies people call dormant don't meet that test. A company that has stopped trading but still has money in the bank, a loan from a director, a property or an investment, or that pays bank charges, is inactive or non-trading rather than dormant in company law terms.
| Dormant (section 365) | Inactive or non-trading | |
|---|---|---|
| Transactions | None that must be recorded | No trading, but may have bank charges, interest or small costs |
| Balance sheet | Only group shares and balances | May include cash, loans, property or investments |
| Audit exemption | Dormant company exemption | Small company exemption, if it meets the size conditions |
| Lost by late filing? | Yes | Yes |
What both still have to do
- File an annual return (Form B1) with financial statements every year, on time
- File a corporation tax return (CT1) with Revenue, even if it's nil: dormancy in company law doesn't remove Revenue obligations
- Keep a company secretary, registered office and statutory registers
Why it matters
The difference changes which audit exemption the company claims and what goes on its balance sheet. It doesn't change the late filing rule: two late annual returns within five years cost either exemption for the following two years. See why companies lose their audit exemption.
Last checked 13 November 2026 against CRO and Revenue guidance. This is general information, not legal advice for your company.