There is plenty of information online about setting up your own limited company as a contractor, but what about closing it down? Our short guide looks at a few different ways a limited company can be closed down depending on its financial standing at the time.
What are your options for closing down your company?
Make your limited company dormant
There may be a time when you want to take a break from contracting but keep your limited company for the future. It is possible to keep your limited company in a dormant state as long as you cease trading and no transactions are made via your business bank account.
If you want to make an active company dormant, you’ll need to contact HMRC to issue you with a notice for a company tax return. You will be required to file yearly accounts for a dormant company and Confirmation Statements to Companies House. These will include share capital information, the company name, the company address and shareholder or guarantor details.
Finally, if your company is VAT registered you will need to notify HMRC that you have stopped trading so they can cancel your registration.
Close a solvent company
Voluntary strike off or dissolution
If your company is solvent and has fulfilled its purpose you can apply to Companies House to have your company removed from the register and closed. You can only have your company struck off the Companies Registrar if:
- Your company hasn’t traded or done any business in the last three months
- Your company has not changed its name in the last three months
- Your company has no existing agreements with creditors such as a Company Voluntary Arrangement (CVA)
- Your company hasn’t recently been threatened with liquidation
If these conditions are met then you will need to complete a striking off form (DS01). Once this has been received an official notice will be published in the Gazette and if no objections are raised then your company will be closed in three months.
Before the company is struck off, all remaining assets can be distributed amongst the shareholders as a final dividend. The tax rates that apply to an informal strike off are either 7.5%, 32.5% or 38.1% depending on the shareholders’ marginal rate of personal tax.
It is also possible to treat the final funds as Capital Gain as long as the retained profits are below £25,000. If the retained profits of the company are over £25,000 you should speak to your accountant to find the most tax-efficient way of drawing funds from the business (such as a Members Voluntary Liquidation).
Members Voluntary Liquidation
A Members Voluntary Liquidation (MVL) is a tax-efficient way of closing down a solvent limited company and distributing the remaining profits as capital to the shareholders.
MVL’s can be a tax-efficient option for shareholders as the profits extracted from the company are subject to Capital Gains Tax, instead of Income Tax which could result in a higher sum being paid to each person.
Closing a company down via an MVL will allow you to take advantage of the Entrepreneurs’ Relief as long as you fulfil certain criteria. Entrepreneurs’ Relief could result in huge tax savings on the profits extracted from your business as there will be less Capital Gains Tax due on qualifying assets (10%) compared to drawing them out as dividends. Read our blog for more information about MVLs and whether it could be the right option for you.
What if your company is insolvent?
Creditors Voluntary Liquidation
A Creditors Voluntary Liquidation (CVL) is the formal process of closing down an insolvent limited company. A CVL does come at a cost, but opting for a CVL rather than being forced into compulsory liquidation will give you more control over the whole process. Here are some reasons why you may have to put your company into CVL:
- The company has been issued a winding-up petition as it has fallen behind on a time-to-pay agreement with HMRC, or has a trade creditor it is unable to pay
- The company is unable to meet its current liabilities and it is in a significant amount of debt
- The company has not met its rent payments and the landlord has appointed bailiffs to seize the company’s assets
A CVL is used to close down a company and deal with all of its outstanding debts during the process. When a company enters into a CVL there is likely to be a significant underpayment to creditors. The assets will be maximised as much as possible to repay the debts and any outstanding debts will be written off once the company has been liquidated.
There are many benefits to liquidating a company via a CVL and the main one is that the directors are less likely to face an investigation for wrongful trading because they have put the creditors’ interests ahead of their own. Directors have more control over proceedings than in a compulsory liquidation and a CVL will give immediate relief from debt.
Compulsory liquidation can occur when one or more of your creditor’s petitions for your company’s liquidation in an attempt to recover some of their money, or the company has undisputed debts of more than £5,000. The costs of a compulsory liquidation are high and it is a last resort whereby a creditor has made a succession of unsuccessful attempts to recover their debt. At this point, the company will be forced into liquidation and any remaining assets will be sold in an attempt to repay the creditors losses.
A compulsory liquidation will often result in an investigation carried out by the Insolvency Service into the conduct of the directors and the issues that led to the insolvency. If any of the directors are found to fall foul of any wrongdoing then it could result in disqualification or worse.
Churchill Knight has been supporting contractors since 1998
Since 1998, Churchill Knight & Associates Ltd has specialised in providing contractors and freelancers with a range of tailored packages to suit various circumstances. We can advise you on the best way to handle your company finances, plan for the future and minimise the administrative burden of running your own business.
If, for whatever reason, you decide to close down your limited company, we will support you every step of the way and make it as seamless as possible. For more information, please give our friendly team a call on 01707 871622 or fill out the short form on this page.