Are you thinking about taking a break, taking a permanent employment or even retiring? Sometimes contractors need to close their limited company. If this is the case, there are a few different options available depending on your circumstances. While there’s plenty of advice on starting a limited company, understanding what’s involved in limited company closure isn’t always straightforward.
We’ve broken down the options available to you depending on whether your company is solvent or insolvent.
What is a solvent company?
A solvent company is one that can pay its liabilities and has no threats of legal action from creditors.
Closing your company if it’s solvent
If you want to close down a limited company while its solvent (it has enough assets to discharge its liabilities), then there are two options available to you:
Dissolution (striking off)
Dissolution is an option only if the capital gain released is less than £25,000. Before you strike off your limited company, you must follow the correct process. This involves:
- Dealing with your employees according to the rules.
- Preparing cessation accounts and filing your final tax returns
- Telling any interested parties and HMRC of your plans to strike off your limited company.
- Settling any outstanding debts and dealing with the sale or transfer of ownership of business assets.
To dissolve a company, you must submit a DS01 form to strike off your company, which needs to be signed by all directors and will be sent to Companies House. You must also send copies to shareholders, creditors, and employees within a week of submitting this form. If no objections have been made, your company will be dissolved within two months of submitting this information. The cost of striking off is £13 (or £18 if doing so by post) and this payment cannot come from the company.
When you dissolve a company, you will be striking it off the register in Companies House, and it will cease to exist. After your company has been struck off, you cannot trade or carry out any business activities through that limited company.
Any assets that are still held by the company at the point it is struck off will become the property of the crown. Therefore, it is important that all of the assets, including cash, have been transferred to the ownership of the shareholders before filing the form DS01.
If you appoint an accountant, they can oversee all statutory filing for your limited company, including necessary paperwork within the deadlines.
Is dissolution right for my company?
Dissolution is suitable if you have reserves of £25,000 or less and have decided that you’re no longer interested in trading through your limited company or you opened it for a specific set of purposes that have now been fulfilled. It is generally a much quicker and cost-effective method than a Members’ Voluntary Liquidation (see below) for companies that meet the criteria.
In order for you to strike off your company, you must not have done any of the following:
- Traded or sold stock for three months
- Changed the company name in the last three months
- Not been threatened with insolvency by creditors
Members’ Voluntary Liquidation (MVL)
Members’ Voluntary Liquidation (MVL) is the closure method used by solvent companies with reserves in excess of £25,000 that cannot use the dissolution route.
If you apply for Members’ Voluntary Liquidation, you will need to complete the following steps:
- All steps outlined in Dissolution (striking off)
- The majority of directors (75%) must sign a declaration of solvency
- Shareholders must pass a resolution for voluntary winding up
- The resolution must be published in The Gazette within 14 days
- An authorised insolvency practitioner must be appointed as a liquidator to take charge of winding up the company. Once this liquidator has been appointed, they will take charge of the limited company
- Within 15 days of passing the resolution, you must inform Companies House of this decision
Is Members’ Voluntary Liquidation right for my company?
Members’ Voluntary Liquidation (sometimes known as solvent liquidation) is appropriate if your business is able to pay its debts and financial obligations but has a level of reserves that preclude using the dissolution route.
It is a lengthier and more formal closure method however in many instances this is preferable to leaving a company open and gradually reducing its reserves over a number of years to the point that dissolution becomes a viable option.
In addition, it can prove much more tax efficient to close via an MVL rather than to declare dividends over time, especially if you have taken employment elsewhere.
Dormancy
A limited company is classed as dormant when it carries out no business activities or hasn’t received income for a period of time.
Before making your company dormant, you must ensure that Corporation Tax is paid in full. You will still need to submit an annual confirmation statement and dormancy accounts to Companies House.
Is dormancy right for my company?
Making a limited company dormant is ideal if you only intend to step away for a short period before you return. Some new limited company directors also set up their business before they are ready to begin trading. On the other hand, there is still a certain level of administrative responsibilities involved.
To learn more, take a look at our guide to company dormancy.
What is an insolvent company?
If your company is insolvent, it may have insufficient funds, have more liabilities than it has in assets, or be facing pressure from creditors.
Closing your company if it’s insolvent
There are three tests to determine whether your company is insolvent:
- The cash flow test – can your company pay its bills?
- The balance sheet test – does the company’s assets exceed liabilities?
- The legal action test – has any legal action been taken out against your company in excess of £750?
In short, if the company’s liabilities exceed its assets, it’s more than likely it will be considered insolvent.
Creditors’ Voluntary Liquidation (CVL)
A Creditors’ Voluntary Liquidation must be undertaken to close your company if it can’t pay bills or its liabilities exceed its assets. For your company to be closed via CVL, an authorised liquidator needs to be appointed. The liquidator will effectively take charge of the company whilst it is being put through liquidation.
Before the company is closed, the director must call a meeting in which all shareholders are expected to be present and vote on a ‘winding-up resolution’ which must be agreed by 75% of these shareholders. Once the decision has been made, the resolution should be sent to Companies House within 15 days and posted on The Gazette within two weeks.
If a liquidator decides that the directors’ conduct was unfit then the directors can be disqualified from acting as a director for between 2 and 15 years and may also face prosecution.
What are my responsibilities when I close my limited company?
Limited company closure is not always straightforward, and there are a few other things you will need to consider:
Deregistering for VAT
If you’re VAT registered, you will need to deregister for VAT. A final VAT period will be created, a return submitted for this period and any VAT due paid to HMRC.
Corporation Tax
Following submission of a final Company Tax Return and payment of any final Corporation Tax liabilities, it is prudent to write to HMRC to advise that the company has ceased trading so that they do not create further return periods.
Personal tax responsibilities
When a company closes, ownership of the cash and other assets (the retained profit in the company) transfers to the shareholders in proportion to their shareholding. This is generally known as a ‘final distribution.’
Once you receive this distribution you then have to consider the personal tax implications. Ordinarily, the disposal of shares (which this effectively is,) is subject to Capital Gains Tax. You would then complete a Capital Gains Tax page on the personal tax return for the tax year in which the distribution is received and pay CGT at either 18% at the basic rate of tax or 24% at the higher rate. If you are entitled to Business Asset Disposal Relief (need a link) then you would pay CGT at 18% regardless of your tax band.
A word of caution at this point though; taking the capital gains route does mean that you need to consider your future activities. There is a Targeted Anti Avoidance Rule (TAAR) to prevent ‘phoenixing,’ which is where the owners close a company to gain a tax advantage and then carry on a similar trade. To meet this rule then you cannot carry on a ‘similar trade’ for at least two years following the closure of your company where you have taken a capital gain.
Thinking about closing your limited company?
If your company has reached the end of its life, closing it doesn’t have to be complicated. An experienced accountant can help closing a limited company in the way that best supports its owner and staff. If you would like to discuss the best option for your company, get in touch.