12 Sep How do I close my limited company?
Reasons why you may consider closing a limited company
There may be a variety of reasons to consider closing your company.
Some of reasons company owners decide to cease trading are:
- The business is no longer profitable or viable
- You are taking a permanent role as an employee
- You have decided to retire
- You have decided for lifestyle reasons
- The limited company structure no longer suits you from a tax or admin point of view.
Ways to close down your limited company
The two main ways to close a limited company are:- Members’ voluntary liquidation (MVL)
- Voluntary strike off
You could also make your limited company dormant if you think you may want to use it again in the future.
Voluntary Strike Off
A limited company can be voluntarily struck off the Companies House register providing it is solvent (i.e. able to settle any outstanding debts) and no longer trading in any form. The directors can be held to be personally accountable if the company is struck off without settling all its debts. Before applying to strike off a limited company, it must be closed down legally.
A voluntary strike off is a fairly simple process that doesn’t require specialist advice and this is generally the best approach where the company’s retained profits are below £25,000.
A company is eligible for striking off if it meets certain conditions:
-
- During the previous three months, the company should not have traded or otherwise carried on business;
- During the previous three months, the company should not have changed its registered name; and
- There should be no threats of liquidation against the company or any creditors’ agreements in place (e.g. CVAs).
The application form to strike off the company (DS01) can be submitted to Companies House provided the company hasn’t traded for a period of three months. If the company has never traded, the closing down process is quicker as you don’t have to wait for a three month non-trading period to pass before submitting the application.The company bank account needs to be closed as part of the three month non-trading period to ensure no transactions pass through it, otherwise HMRC consider this as still trading.If registered for VAT, PAYE and corporation tax, the company also needs to notify HMRC of the intention to close the company.
On receiving the application, Companies House will publish notices in the London Gazette to give any interested parties the opportunity to object to the striking off. Companies House will also check with HMRC to establish if there are any outstanding tax liabilities. The striking off process will take a couple of months to complete.
Company accounts will need to be prepared up to the final date of trading. These accounts will need to be submitted to HMRC with a final corporation tax return for the same period. Corporation tax will need to be paid as usual if there are taxable profits in the final trading period, so you will need to ensure that this tax, and any other liabilities are settled before you close the limited company bank account.
Extracting profits with less than £25,000 retained profits by Voluntary Strike Off
For any amounts up to the limit of £25,000 or under, profits can be extracted from the company and redistributed to shareholders as capital gains.
You will pay the regular rate of Capital Gains Tax but there is an annual allowance of £12,300 in the 2022-23 tax year which means that gains up to this amount will not be subject to tax. Any gains exceeding this allowance will be taxed at 10% for a basic rate taxpayer, or 20% if paying more than the basic rate of Income Tax.
However, if you’re eligible to apply for business assets disposal relief you will pay a tax rate of 10% on the disposal, regardless of the rate of personal tax you pay.
Extracting profits with more than £25,000 retained profits by Voluntary Strike Off
If the company’s retained profits are in excess of £25,000, these are usually distributed among the company’s shareholders in the form of a final dividend. Shareholders will be required to pay income tax at their relevant personal income tax rates, which will depend on whether profits are taken as salary or dividends or a combination of the two.
Directors who receive dividend payments are liable to pay income tax on any payment above £2,000. Dividends attract income tax at the current dividend rates 8.75%, 33.75% and 39.35% in the 2022-23 tax year, depending on your marginal rate of personal tax.
If your retained profits are above £25,000 you should speak to an accountant to try and find the most tax efficient way to reduce your retained profits to the £25,000 figure for maximum tax efficiency.
Members Voluntary Liquidation (MVL)
The alternative approach is a Members Voluntary Liquidation (MVL), where a solvent company’s assets are turned into cash and then distributed to shareholders.
The main tax advantage of closing a limited company using MVL as opposed to Voluntary Strike Off is that the distributions of retained profits amongst shareholders are subject to CGT (as opposed to dividends tax or income tax). If you have cash reserves over £25,000, you could extract the profits whilst paying tax at a rate of just 10% by using an MVL. This allows you to close your limited company in the most tax efficient manner.
Whilst £25,000 is the legal threshold for qualification for MVL, most financial experts agree that you need around £35,000 of clear profit for MVL to start to become really advantageous due to professional liquidators fees. Unlike Voluntary Strike Off, there is no differentiation of profits above or below £25,000. All profits will come under CGT.
With an MVL, instead of taking the retained profits as a final dividend (which counts as taxable personal income), the profits are distributed to shareholders as a capital gain, and so is subject to capital gains tax rather than income tax. This is the key difference, as it can mean a much lower final tax bill if you also qualify for Business Assets Disposal Relief, with the tax rate being 10%. However, you would need to appoint a licensed insolvency practitioner to manage the process and this usually costs several thousand pounds. Also, the process can take up to 12 months to fully complete. Even taking into account the insolvency practitioners fee, an MVL can out much less costly if you have large retained profits.
If the balance sheet reflects retained profits of more than £35,000, these profits can be distributed as either a director’s salary or a dividend and the shareholders will be taxed at their relevant tax rates. Whilst this may be beneficial in terms of making use of income tax free brackets, the downside is that where these retained profits are distributed as a final dividend, the dividend tax rates that apply to a strike off are either 8.75%, 33.75% and 39.35%, depending on your marginal rate of personal tax.
Regardless of your marginal rate it is usually going to be better to bring the retained profits down to £25,000 and take this as a capital distribution upon closure and paying tax of £1,270 (£25,000 profits less £12,300 capital gains allowance for the 2022/23 tax year, leaving £12,700 to be taxed at 10% business assets disposal relief, assuming you are eligible.
If some of the retained profits are paid as salary to a director (rather than as a dividend) then the amount of tax paid depends on the director’s personal rate, which is usually higher than the dividend tax rate and may also mean there are National Insurance Contributions for the company and director to pay as well.
Distributions from the voluntary liquidation of a company may be subject to Income Tax under the following circumstances:
-
- The company is a ‘Close Company’ (i.e. has five or fewer shareholders)
- Within two years after receiving a distribution the owner is involved with a similar trade or activity
- The winding up of the company appears to be to reduce tax.
Other considerations
An MVL cannot be used by directors who intend to set up another company after closing their current limited company and extracting the profits.
If a company is struck off when its share capital or non-distributable reserves or any other assets have not been distributed to shareholders, that undistributed property will become the property of the Crown, by virtue of Bona Vacantia.
Once struck off a company can be restored to the Companies Register within six years of dissolution, however this can be quite a complex process.
Business documents must be kept for 7 years after the company is dissolved.
If your company cannot pay its debts, you cannot apply for a voluntary strike off and you may have to liquidate your company by way of a MVL.
Questions?
If you have any questions about closing your limited company, please get in touch and we will be happy to help! You can call us on 01386 764741.
-