There are a lot of reasons why you might decide to close down your limited company. Perhaps, you are planning to go back to being a sole trader or to being a full-time employee or you simply want to retire. Whatever it may be, do you know what are your options and how will you determine which is best for you?
In case your limited company is earning enough money and you choose to close it down due to tax issues, then you should consult your accountant .
After finally deciding that closing down your company is the best thing to do, then you must learn what are the important things that you need to consider. Here, we will provide you with some options.
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Closing A Limited Company? Tie Up Your Loose Ends First
Whether you are planning to change direction, wants to retire or wants to continue with the business as a sole trader, it is important that all the legal loose ends of your limited company must be tied up.
In other words, you have to make sure that you have collected all the money owed from your customers, settled all your outstanding bills, and most of all ensure that you still have some money left to pay for the expenses incurred between now and when your company is legally closed. For instance, paying your accountant for filing your final returns or paying a collection service to collect those late payments.
Fortunately, these costs can be considered as allowable business expenses, so it can lessen your final Corporation Tax bill.
If you are VAT registered, then you need to de-register your company by accomplishing a VAT 7 form from HMRC. Once HMRC has received your form, then they will inform you about your deregistration date. It is required that you must continue to account for VAT until such time that HMRC will provide your deregistration date.
You should also complete your final VAT return and make sure that you have all the things accounted for including the equipment that you’ve used for your business as well as any leftover stock.
It is important to inform HMRC that your company has already stopped trading so they won’t send you further reminders for Corporation Tax anymore. Accomplishing this will greatly depend on whether HMRC has requested your company to file a tax return.
In case your company has not received any “notice to deliver a company tax return”, then you can inform HMRC that you have a dormant company through their phone number 0300 200 3410 or by mail, just send them to Corporation Tax Services, HMRC, BX9 1AX, UK.
In the event that your company has already filed a company tax return or have acquired a “notice to deliver a company tax return”, you are still required to file a company tax return online. This can convince HMRC that your company is inactive. If you require any guidance from HMRC, then you can visit the Gov.uk website.
If your company is using a PAYE scheme, then you also need to inform HMRC that it is no longer operational and you must close it down. HMRC has published some instructions that you need to follow in closing down the scheme.
If you are a freelancer operating a limited company, then there is a great chance that the equipment that you use are owned by your company including your laptop. If you are taking possession of company equipment when your company will finally shut down, then you have to pay Capital Gains Tax on those items.
Is Your Company Solvent or Insolvent?
Here are some things that you need to consider:
- Do you think your company have more assets than liabilities?
- Is your company capable of paying its debts promptly?
If your response to both of these questions is “yes” then your company can be considered as a solvent and you have assets that will be shared to your shareholders.
On the other hand, if your response to both of these questions is “no”, then your company is considered as insolvent and it does not have enough resources to pay for its liabilities.
How To Close A Limited Company If Its Solvent
If you are planning to close your solvent company, then here are a few options for you.
If you want to strike-off your limited company from Companies House, then the director of your company must file a striking off form (DS01).
You will be required to provide relevant information about your company such as your company name, your Company Registration Number (CRN), as well as the names and signatures of your company’s directors. You must also include a cheque for £10 and make sure that you are not using the account of the company that you will strike-off.
After this has been received, a notice in an official public record or the Gazette will be published by the Companies House. It will be published in Edinburgh, London, or Belfast. This is done to make third parties aware of the closure in case they want to object. Obviously, if you have not really traded, then there shouldn’t be any problem at all.
If there are no objections, then Companies House will approve the closure of your company in the Gazette after three months have passed. Due to the Coronavirus pandemic, there will be some delays in the removal process of companies from the Register of Companies since the Companies House has suspended the processing from March 2020 to September 10, 2020.
If your closing company has some profits that will be distributed to its shareholders then it has to be done fairly. You have to consider the most tax-efficient way of distributing them. Keep in mind that if you have assets in your company, then you have to transfer them before you close it down. Once a company is struck off, then its bank accounts will be frozen and the Crown will take away any balances.
Members Voluntary Liquidation
By using Members Voluntary Liquidation (MVL), you can easily get cash from your business in a tax-efficient way. In this way, the remaining profits from your company will be distributed fairly to your shareholders as capital rather than as dividends.
The major benefit of liquidating your company using an MVL is you’ll get the chance to obtain all of the assets that are subject to Capital Gains Tax, instead of Income Tax. In other words, you will have more money in your pocket.
However, if you choose to close your company through an MVL, then it will cost you approximately £2,250. That is why it is only practical to use this option if your retained profits are more than £35,000. If you are getting confused about which method works for you, then you should get some advice from your accountant.
How To Close An Insolvent Company
If all the shareholders and directors of your company agreed that your company is insolvent, then you will need a Creditors’ Voluntary Liquidation (CVL) to close it down. In this particular situation, the assets of the company are designated to the people or companies it owes money to.
Before you can continue, be sure that 75% of shareholders have agreed to a CVL. If everything has been settled, then you have to seek the help of a licenced Insolvency Practitioner who can give you some advice on your next steps. The duration of completing the CVL process will vary from one business to another. Most likely, this will depend on the size of the company and the complexities of its debts and assets.
After the process has been done, then the company will be struck off from the list of Companies House and officially they do not exist anymore.
There are times that a creditor might file a winding-up petition. Once this is successful, the court will immediately authorise the business to be wound up. This process is also known as a Compulsory Liquidation.
Make Your Limited Company Dormant
If you are considering to return back to trading through your limited company in the days to come, then you can always choose to put it “on hold”.
Rather than telling HMRC that you want to close down your limited company, you could declare the company as “dormant.” Although you will still be required to file certain tax returns, however, these are just “nil returns.” This means that you are just reporting a bunch of zeroes to HMRC just to let them know that you are not trading.
In the meantime, you could work as a sole trader. Although you can still return back to working on your limited company when the time comes that you are already financially stable. Keep in mind that this can make your Self Assessment a bit more complicated.
Going Back To Being A Sole Trader
Deciding to work as a trader might be a reasonable option in case your company is not earning too much money. However, every person’s situation is different. The rule of thumb is if the annual profits that you obtained from your company are less than £30,000, then it would be better if you will just work as a sole trader. After all, you will have less accounting and paperwork to deal with.
As what you can see from the discussion above, dissolving a limited company will be a bit complicated. But don’t worry, there are other considerations. In case you have cancelled your registration from the Flat Rate VAT scheme, then you will not be able to re-register for a year. In case you want to re-incorporate, then you’ll be glad to know that this could leave you out of pocket.