What is the most tax efficient way to close a limited company

As accountants we want all our clients and blog readers businesses to grow and thrive. However, that is not always the case and sometimes there are compelling reasons to close a limited company. Sometimes the owner may want to change the model of the business, such as moving to a sole trader or to a partnership. Often it is because the owner of the business wants to exit for personal reasons like retiring. Some businesses also need to close as the company is simply no longer viable because it may owe money that it can never pay back, or is just no longer profitable and will never be again.

If you are currently in any of those situations, you need to consider what the best way to close a company is, with respect to any tax that you may be liable for. That is where getting good advice can really help, as working out the most tax efficient way to close your business will depend on your own individual circumstances.

Can I just close my limited company?

In the simplest terms you can just close your company yourself, by applying to Companies House to have the business voluntarily wound up and taken off their register. This is known as being “struck off” the companies register. This is also known as “dissolving” your company. You can only do this if the company has not traded or sold any stock or changed names in the last 3 months.

Making your company dormant

One option that should always be considered is if you may want to trade again as a limited company in the future. If that may be the case, it may be worthwhile exploring the option of making the company dormant. Effectively this means the company is no longer actively trading but it does continue to be listed at Companies House and can be used later. This means that you can still own the company name for future use and means you won’t have to re-register a new company again if you wish to begin trading again.

This is particularly important if you have built up a valuable brand name in the business that may have value over and above the state of the business and you think would bring customers to you far more quickly in the future than having to start again with a completely new name. Brands and company names that resonate with their chosen audiences are often hard to create so this is always an option worth considering.

If, however this is not the case and you really need to close your company for the right reasons then, as with everything in business, closing your company is usually far more complicated than the previous. You cannot just shut your website, delete your Google my business listing and put a notice on the door and move on. There are different legal things you will need to do and if you want to make sure you reduce the amount of tax you will need to pay you need to look at all the options for the type and state of your business.

How much does it cost to close down a limited company?

The costs of closing a limited company, and likewise the different actions and steps you need to take will depend on if your company is solvent or insolvent. If your business has more assets than liabilities and can still pay its bills it is defined as “solvent”. There are two main ways to close a solvent business
Member’s Voluntary Liquidation (MVL).

If you apply for MVL, any directors need to sign a Declaration of Solvency, which confirms that the company is solvent. Any shareholders of the business then must vote on the MVL, and at least 75% must be in favour for it to be passed.

If the company is liquidised, a licensed insolvency practitioner (IP) will need to be appointed to administer the process. At that point any assets of the business will be sold off with the proceeds distributed between any creditors. Once they have been paid anything left is split between the shareholders.

With an MVL, instead of taking retained profits as a final dividend, any profits are distributed to shareholders as a capital gain, and so are subject to standard capital gains tax. It is worth checking if you qualify for entrepreneurs’ relief as that can lower the bill. If you have cash reserves of over £35,000, 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.

If you decide to liquidate your company using the help of a licenced insolvency practitioner, your remaining reserves will be distributed as capital and subject to Capital Gains Tax (CGT). The government does have a handy tool to help you search for a insolvency practitioner in your area which you can see here. When you employ and ILP of course you will have to pay their fee’s but overall it can work out much less costly and they can provide help and advice through the process.

Company dissolution

As mentioned previously the cheapest way to close a limited company is through company dissolution, basically being struck off the Companies House register. As well as not trading or changing names in the last three months you must also close down your payroll scheme, make sure you tell your creditors the company is being dissolved and pay any outstanding bills, and of course pay any tax and National Insurance liabilities! Once that’s all done you complete a DS01 form and send it to Companies House along with the required fee.

What happens if my company is insolvent?

If your company is insolvent i.e., you cannot pay your bills, then either you will need to put your company into liquidation or worst-case scenario you may be forced into liquidation, especially if you don’t pay any creditors you may have.

If a business gets to this point your creditors have legal priority over any shareholders and directors in having access to any company funds left in the business. You are also in danger of being potentially investigated by the insolvency service for misconduct, so it is always advisable to appoint a recognised insolvency practitioner. They may advise that you look to a Creditors’ Voluntary Liquidation (CVL). You must cease trading to protect any creditor interests and shareholders vote on a winding up resolution. You then present your creditors with a repayment proposal and if they vote to accept it, the insolvency practitioner will take control of your company’s assets.

A compulsory liquidation is where your creditors force you and the company into liquidation to recover any money they are owed. It can be initiated by a director, the company itself, or the company’s creditors if they are owed £750 or more, by lodging a winding-up petition at court.

As you can see closing a company and ensuring it is done in the most tax efficient manner is not a simple process and we would always recommend you get the best advice if this is a position you find yourself in. If you need advice or support, we are here to help so please do contact us today.