How to close a limited company

Around 10% of businesses close each year for a variety of different reasons. It could be that the owners want to retire, a company is bought out and merged into another, or a business runs into financial difficulty and it can’t meet its creditors’ bills.

Unfortunately for directors and shareholders, closing a limited company is far more complex than when a sole trader ceases trading.

In this article, Black and White Accounting examines the different options available to you for closing your limited company. In almost all cases, closing a limited company (whether it’s you doing the closing or the closure is being forced on you) requires prior planning and preparation.

We urge you strongly to seek professional advice in all cases. To speak with an experienced accountant at Black and White about closing a limited company, please call us on 0800 140 464 or click here to email us. Our service is completely confidential and delivered with your best interests at heart.

Below, we’ll share the latest information with you on:

• closing your company and dealing with HMRC;
• closing a solvent limited company;
• closing an insolvent limited company; and
• most frequently asked questions about closing a limited company.

Closing your company and dealing with HMRC

HMRC were there from the formation of your limited company and it’ll be no surprise to any director or shareholder that, when you want to close your company, they’ll want to be there too. When closing a limited company, you always have to inform HMRC.

There are always many loose ends you’ll need to tie up before the process is complete.

You’ll have to make sure that all of your company’s bills to your suppliers are settled as well as making sure that all of your clients have paid you in full.

You’ll have to ensure that there’s enough money to cover your general running costs before your company is struck off the register and you’ll likely to have pay solicitors and accountants to assist you with the dissolution.

The costs of closing a company are legitimate and claimable business expenses which you can use to reduce your liability for your final Corporation Tax bill. And, on that subject…

Corporation Tax

You need to prepare your final accounts (sometimes called cessation accounts) and Company Tax Returns and send them to HMRC stating that these are your company’s final trading accounts and that your company will be dissolved. HMRC should send you no further reminders or CT600s from that point.

Black and White thought – will you make a loss in your final year of trading? If so, you can offset that loss and set them off against your profits from the previous three years. The situation becomes more complicated if you want to transfer your trade to another person – please ask us for more information.

VAT (if applicable)

To deregister for VAT, you need to complete a VAT 7 form.

On receipt, you’ll hear from HMRC what your deregistration date is going to be. You must continue to keep Making Tax Digital-compliant VAT records up to this date.

On your final VAT return, you (or your accountant) must take into account any equipment, company assets, or leftover stock still owned by your business.

PAYE (if applicable)

You (or your accountant) also need to let HMRC know that you no longer need to operate a PAYE scheme – you can do so at this link. You’ll need to complete either a Full Payment Submission (FPS) or Employer Payment Summary (EPS). You’ll need to make a final pay of income tax you’ve collected from your staff, your Employee National Insurance Contributions, and your Employer National Insurance Contributions.

You’ll also need to give your employees a P45 on their last day, enter a leaving date onto each staff member’s payroll records, and send in your expenses and benefits returns.

Capital Gains Tax

Capital Gains Tax (CGT) is more a consideration for contractors and freelancers who have used personal service companies for trading purposes because, in many cases, it’s more tax efficient to operate in this way.

Many contractors and freelancers use equipment like laptops, mobile phones, and software both in a personal and professional capacity. If you end up taking full personal ownership of these assets when you close the company, you may be liable for CGT.

Black and White thought – Depending on what assets are left in the company, it might be more tax efficient to apply entrepreneurs’ relief on the final withdrawals from the company, which is discussed more below.

What does “solvent” and “insolvent” mean?

The options open to you to close the company you own will depend greatly on whether it is trading solvently or insolvently.

If your company…

• has more assets than liabilities;
• is able to promptly pay off its debts on time and in full to HMRC and other creditors; and/or
• has no legal action has been started against your company in excess of £750.

…yours is likely a solvent company. With a solvent company, there will often be cash and assets left when your company no longer exists which will be distributed to shareholders prior to dissolution.

If your company

• has more liabilities than assets;
• may not be able to promptly pay off its debts on time and in full to HMRC and other creditors; and/or
• legal action has been started against your company in excess of £750.

…yours is likely an insolvent company.

How do I close a solvent limited company?

Strike off your company

To close your solvent company (sometimes called “winding up your limited company”), you apply for it to be struck off the register at Companies House.

There are certain conditions you have to fulfil to have your company struck off the record and they are that:

• your company have no current agreements with creditors like a company voluntary arrangement;
• your company has not changed names in the last 3 months;
• your company has not been threatened with liquidation;
• your company has no existing debts; and
• your company hasn’t traded or sold any of its shares or stock in the last 3 months.

If you have, for example, changed your company name or sold goods and services to clients in the last three months, you do not meet the requirements necessary to strike off your company and you will need to consider a Members’ Voluntary Liquidation (MVL) instead.

If you do satisfy these requirements, you or your accountant can apply to Companies House for a form DS01. You can obtain a form DS01 on the gov.uk website by clicking here.

Black and White thought – striking off your company (dissolution) is a less complicated and more tax efficient option for companies where there are retained profits of £25,000 or less. Although all shareholders might be subject to CGT, there is an annual allowance of £12,300 on which you won’t pay CGT. If there are retained profits of more than £25,000, shareholders will normally receive a final dividend. If this is the case, a Liquidator will have to be appointed to manage the closure, as detailed in MVL section below.

MVL

An MVL is generally the most tax efficient option for company directors and shareholders to obtain the value of the company where there are assets left to distribute.

For an MVL to occur, the following needs to happen:

• 75% or more of the company directors need to sign a “declaration of solvency”;
• shareholders then need to pass a resolution authorising the voluntary winding up of the company;
• this winding up resolution needs to be published in the Gazette within 14 days;
• you must inform Companies House of your decision within 15 days of the resolution being passed; and
• the company directors and shareholders then need to appoint an authorised insolvency practitioner to take over the process. Upon appointment, the authorised insolvency practitioner then takes full charge of the limited company.

Black and White thought – the cost of MVL normally starts from £2,000 + VAT, with the actual price dependent on how complex the process will be. You should consult with an accountant prior to choosing which of the two options (being struck off or an MVL) is most tax efficient for you and for each company director and shareholder. If it can unlock Entrepreneurs’ Relief the cost of the Liquidator can often be outweighed by the tax saving, which is why MVL’s are often a popular option for directors and shareholders.

What happens if I try to close my company and it owes money to HMRC and/or other creditors?

If you try to strike off a limited company or initiate an MVL procedure when it owes tax to HMRC or it has unpaid debts to its creditors, they may raise an “Objection to Company Strike Off” with Companies House.

If they do raise this objection, you will almost certainly not be about to proceed with striking off or your liquidation until any and all outstanding amounts are paid off in full, or an agreement is made. An accountant or Liquidator can help you through this to make it as easy as possible for you.

Closing an insolvent limited company

There are two main routes which lead to the closure of your company if your company is insolvent – a Creditors’ Voluntary Liquidation (CVL) or a compulsory liquidation.

CVL

A CVL is a director-led process and the way you start one is very similar to the process of initiating an MVL. A CVL is designed for companies whose liabilities are greater than their assets or which can’t pay its bills.

You appoint an Insolvency Practitioner to:

• collect all outstanding debts owed to your company;
• inform and involve HMRC and other relevant governmental bodies including Companies House in the process;
• handle employee claims; and
• distribute remaining proceeds to creditors in the order of priority set down by the Insolvency Act 1986.

Compulsory liquidation

Unlike a CVL, which is initiated by the directors and shareholders, a compulsory liquidation is a forcible attempt to shut down a company which its creditors have come to believe is insolvent.

Normally started by one creditor of a company (on many occasions HMRC), the compulsory liquidation process normally begins with a “Winding-Up Petition”. The Winding Up Petition is sent to the company when the company owes the creditor more than £750 and payment of the debt is 21 days or more late.

If the petition is granted, a notice will appear in the Gazette at which point the company’s bank account will generally be frozen.

Seven days after the petition is granted, a court judge then makes the decision on whether a “Winding Up Order” should be granted.

If they issue the order, the judge then appoints an Official Receiver (sometimes called a liquidator). The Official Receiver takes over control of the company and all existing directors will have no further involvement in the running of the company.

The Official Receiver then begins to liquidate the company’s assets including its machinery, property, vehicles, and stock. The proceeds of the sales of these assets (together with any remaining cash held in the company’s bank account) will then be used to repay the company’s debts. After this is completed, the company will be closed down and struck off the register at Companies House.

Black and White thought – in this situation, you need representation from a solicitor and an accountant to try to protect you from any effort to hold you personally responsible for the company’s debts and from disqualification as a director.

Closing companies and Coronavirus

During the Coronavirus, there have been changes to the wrongful trading laws and Companies House have also paused the closure of companies for periods. It is therefore not business as usual, so even more than usual if you find yourself wanting to close a solvent or insolvent company we recommend taking professional advice to ensure the best outcome for you.

How to close a limited company Quick FAQ

Can I close a company and start a new one?

Yes unless you have been barred from being a director. There are some anti-avoidance rules though, so you might have to be careful here.

Returning to sole trader status

Many accountants advice clients running limited companies to return to being a sole trader if their level of annual profits are less than £30,000. However, every individual case is different and we’d strongly recommend that you take advice.

How do you close a company which is dormant or which has never traded?

You need to use a DS01 form to close a dormant company or a company which has never traded.

Expert help to close a limited company from experienced accountants

As you can see from our article, there are many different ways to close a company – some of these methods you initiate and some of them are initiated by HMRC and company creditors. Whatever your situation, it’s best to ensure that you’re professionally represented throughout the process so that your interests are best protected. We’d love to help you through this process, whether we directly can help and support you, or if we need to bring one of our strategic partners in, we are here for you.

To find out more about the services we provide to directors and shareholders closing their limited companies, please get in touch with us today, by contacting Black and White Chartered Certified Accountants, populating the “Got a Question” form on the right, or calling us on our helpline 0800 140 464 for confidential advice.

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