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All good things must come to an end and limited companies are no exception. Whether you’re switching to employment, retiring or starting something new, there may come a point when you want to shut down your business. What are the options to close your limited company and how does it affect your tax?
Here we’ll be looking at the process of shutting a solvent limited company. This won’t cover sole trader or partnerships businesses. It won’t discuss selling the company or dealing with an insolvent company that’s no longer able to pay its debts.
Whatever method you chose to close your limited company, there are some actions to take in preparation before shutting down your business.
If you work with an accountant, it’s beneficial to discuss your plans with them as far in advance as possible. They’ll help you make sure everything is done correctly and may be able to offer some tax saving advice.
You need to make sure that all company debts are settled. This may include any suppliers, bank or other loans, and tax owed to HMRC. Settling any director’s loan balance would also be advisable, particularly if it’s overdrawn.
If you have a payroll running, you’ll need to issue P45’s to all staff. You can notify HMRC that the payroll is ceasing through the RTI process.
Where you’re VAT registered you’ll need to de-register for VAT. If the business owns significant assets or how large amounts of stock, there may be VAT to pay on these items at deregistration.
If you’re a CIS contractor or subcontractor in the construction industry, you’ll need to notify the CIS helpline .
You’ll need a final corporation tax return, to the date you are closing the business.
If you claimed capital allowances on your business assets, you may end up owing part of them back on any assets that still have value when you cease the business. This applies whether you sell the assets or just kept them for your own personal use.
If you sell any assets that have increased in value since you bought them, there may also be corporation tax on the capital gains.
If you have a solvent limited company (can pay its bills) there are two main options for closing down. These are Strike Off or Members Voluntary Liquidation. The best option for you will largely depend how much retained profit is left in the business.
You can apply to have the company struck off the register at Companies House through an informal or voluntary strike off. It can be done if the company has not traded (or changed its name) for three months. The company director completes a DS-01 form which is submitted to Companies House.
Companies House publishes notice of the proposed striking off. During the next two months any interested parties can contact Companies House and object to the striking off. This most commonly happens were there are unpaid debts, in particular to banks or HMRC.
You don’t need to submit any final accounts to Companies House, but you will need to submit a final corporation tax return to HMRC. You must settle any corporation tax due before the company can be struck off.
Once the company has been dissolved, the bank account will no longer be accessible, so make sure all remaining funds are withdrawn before the DS-01 form is submitted.
Up to £25,000 of retained profits at closure can be treated as a capital distribution. This means it is taxed at the capital gains rates of 10% (basic rate) or 20% (higher rate). If the business qualifies for Business Asset Disposal Relief, the tax rate on the gains is 10%.
Retained profits above £25,000 are taxed as dividends. Dividends that fall outside the basic rate are currently taxed at 33.75% (higher rate) or 39.35% (additional rate).
If your company has retained profits below £25,000, the voluntary strike off process would usually be the most appropriate option.
Advantages of this option are that it’s a lot less expensive and doesn’t require a liquidator or even an accountant. It’s usually a quicker process providing all creditors have been settled.
The Members Voluntary Liquidation (MVL) process has to be carried out by a professional insolvency practitioner and can’t be done by your tax accountant. Most accountancy practices have insolvency practices that they work with regularly or can recommend, if you aren’t sure where to start.
The insolvency practice will deal with all aspects of the company closure, although they may work with your accountant to obtain any relevant information. They effectively take control of the company in order to deal with the liquidation process and will then distribute the remaining proceeds.
The main tax advantage of an MVL is that all the retained profits left in the company can be treated as a capital distribution, not just £25,000. Taxing all the retained profits as capital rather than dividends can make a significant tax saving on a larger amount.
If Business Asset Disposal Relief can be applied, the tax rate is 10% rather than 20% which can save even more tax.
If the company has significant financial assets, a Members Voluntary Liquidation (MVL) may be more tax efficient.
One disadvantage of this option is that you can’t have a significant interest in a similar company within 2 years. This applies to not only you, but connected parties such as your spouse, parent or child. This is part of the Targeted Anti Avoidance Rules (TAAR) which aim to stop phoenixing. It’s where companies wind up in order to avoid income tax and then immediately restart.
The MVL process is slower than the voluntary striking off, taking around 6 months. It is more expensive with insolvency firms charges of around £2,500 and upwards.
Business Asset Disposal Relief used to be known as Entrepreneur’s Relief until 2020. It allows a capital gains tax rate of 10% to be applied across the whole of the eligible gain.
It applies in a number of situations including when you sell shares in limited company or when capital distributions are made on the winding up of a company. This could include the £25,000 capital for a voluntary strike off, or the entire capital distribution in a Members Voluntary Liquidation.
There are a number of criteria that must be met in order for you to claim the relief. For the last 2 years it must have been a trading company and you must have held an office (such as director) or been an employee. You need to own at least 5% of the shares to be eligible for the relief.
The rules around Business Asset Disposal Relief are complex. It’s definitely worthwhile seeking further advice and support if you think it may apply to your business.
A third option is to become dormant rather than close your limited company completely.
Dormant has slightly different meanings from a Companies House and HMRC perspective, but the overall principle is the same. You would go through the same preparation process with your company as if you were closing down, but instead of taking the next step and striking off or liquidating the company, it remains open.
There will still be some accounting and administrative overhead each year. You would still need to submit an Annual Confirmation Statement and accounts to Companies House. If you’ve closed down your bank account and have no significant business transactions at all, then you can use the dormant accounts format with Companies House.
You should inform HMRC that the company is dormant for corporation tax and file a final return. After that there should be no further corporation tax returns required unless you start to trade again.
This route allows you to retain the company name. It gives the ability to restart the company again at a future date, rather than opening a new company.
It can be useful if you aren’t sure of your future plans. For example, you could start employment but keep the company open for a few years in case it doesn’t work out. It can also be useful if there is some brand or special significance to the company name.
If you withdraw your company’s retained earnings, these funds would be considered to be dividends and taxed at the current dividend rates.
Sometimes companies are kept as non-trading rather than dormant, with the bank account still open. The retained profits are taken as dividends over a number of years rather than in a single tax year.
If you’re considering whether to close your limited company and aren’t sure which option would be most appropriate, speaking to an accountant and a insolvency practice is a good starting point. They’ll be able to advise you from both perspectives and help you make the right decision for your particular situation.
The further in advance you can obtain advice, the better. There may actions you can take over the next few tax years that will help to reduce the tax due on closure.
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