Updated on: Feb 17, 2024
Last week we took you through the process of opening a new limited company in the UK with an in-depth article on company formation. Today let’s take a look at the main factors and processes involved in closing down a UK limited company.
This article, Closing Down a Limited Company, focuses on the steps involved that relate, in particular, to our normal client base of limited company contractors. The steps are fairly generic however, and can be applied to most small businesses in the UK who work through a limited company structure.
Not a Client?
Just quickly I wanted to touch on the point that we can help limited company contractors close down their own company even if they’re not an existing client of ours. This may be just a piece of shameless advertising on our part, but we do actually do this on a regular basis where the contractor has either been looking after their own accounting requirements, or where they have fallen out with their existing accountant.
Either way, we have a simple process for clients wanting to close a limited company that has been developed over numerous years and across several legislation changes to ensure all the required steps are completed, and most importantly, that the contractor is extracting their retained funds from the business in the most tax efficient manner.
Bringing everything up to date
This may seem obvious but the first step to close a limited company is to ensure that all of its existing filing obligations have been met. Here we look at things such as:
(a) has the most recent set of annual accounts being filed with Companies House;
(b) have the most recent accounts and corporation tax return being filed with HMRC;
(c) is the VAT account up to date and have all required filings being made so far; and
(d) has the PAYE account being filing RTI returns to the HMRC and is everything up to date.
Alongside this we will also check to ensure any taxes due as a result of the above filings have all been paid.
And finally, we check to ensure all of the accounting transactions are up to date in whatever accounting software the client uses (in our case the vast majority of our clients use our free Simplifi accounting software).
For the clients who approach us specifically just to close down their limited company they may be using Xero, Freeagent, or if they’re not VAT registered, they may just be doing their bookkeeping within a spreadsheet. Either way we can take this accounting data and use it to process the close-down of the company.
Once this step has been completed, we know that all the company filings and accounting records are up to date. This gives us the platform we need to proceed with the next step of closing down the limited company.
Tax efficiently closing the company
This step is where the most value typically gets delivered by our accounting firm. Because we have closed down so many limited companies over the years we know there are various considerations around how best to close down the company to ensure the contractor can extract any retained funds as tax sufficiently as possible.
Just quickly, retained funds in your business is any cash and company assets held on the balance sheet on the last day of trading after you factored in any payments that will be due to your creditors (which will mainly be taxes that are required to be paid to the HMRC following the final submission of your closing accounts, VAT return, and PAYE returns). It is essentially the surplus of cash and assets held in your business and it is this area that we concentrate on to ensure funds move from your business account to your personal account in the most tax efficient manner.
Of course, if you are looking to close down your company and you have very little retained earnings, (less than £1,000), then you won’t really be too concerned about your options because the scope for making tax savings on this amount is relatively low. In a lot of these cases the client can make use of the £1,000 dividend allowance and so long as this has not already been used in the current tax year, a dividend payment of up to £1,000 will be tax free and it will not contribute towards boosting any other income into a higher tax bracket.
If the retained earnings in your business exceeds around £30,000 then the option of using a members voluntary liquidation (MVL) starts to become attractive. This is where a liquidator is appointed to close down the company. The sole purpose of doing this is to ensure any final distributions made from the company are treated as capital gains. In cases like this the client can take advantage of business asset disposal relief (BADR) where they will pay 10% capital gains tax on all qualifying gains. From a tax perspective this is by far the most tax efficient way of extracting funds from a business that is closing down and that has this level of retained earnings.
The term “liquidation” often has negative connotations, but an MVL is different because it can only be performed on a solvent company that is in good financial health. In contrast, a creditors voluntary liquidation is done if the company is insolvent and cannot pay its own debts. We won’t be covering how to close an insolvent company here.
If you are permanently moving overseas, or if you have high levels of other UK based income, then this may also be a factor in determining how best to extract funds from your business.
At the end of the day, there are numerous factors to consider when determining how best to extract funds when you close a limited company and once your overall position has been considered “in the round” there will usually be one clear frontrunner in terms of the best arrangement to use.
Closing the VAT account
If your company is VAT registered then you need to notify the HMRC that your business has ceased trading and that you would like to close down your VAT account. Fortunately this is straightforward and can be done through your HMRC online account.
Log into your HMRC online account. Under the VAT section click the “Manage your VAT account” link, and then click the “Cancel VAT registration” link. Then just work through the questions. Once you have completed this step and once the HMRC have processed this information they will issue your business with a final VAT return that needs to be completed. For our clients, often this final VAT return is nil, but regardless it needs to be filed, and if any VAT is due, this will need to be paid. Once these two things are done there is nothing else to do, and the HMRC will successfully close your company VAT account.
Closing the PAYE account
With the advent of making tax digital, and RTI filing, closing your company PAYE account is straightforward. What you need to do is file any remaining payrolls for your business, issue all employees with a P45, and then within your payroll software record a “Cessation of trade” date.
The way this gets done varies across different payroll packages, however for our clients who use our accounting service this is taken care of for them.
The company must then make a final EPS filing that will send the cessation of trade date across to the HMRC. This notifies them that the company has now ceased trading, and the HMRC will take steps to close the PAYE account.
It goes without saying, make sure your PAYE account with the HMRC is fully up to date and that all income tax and national insurance contributions that are due have been paid.
Closing the Corporation Tax account
When your business ceases to trade you must also notify the corporation tax office, so that they no longer expect to receive corporation tax returns for your business. You may also have a company tax return to file for a shorter than normal period. Where your business has traded previously, and has now ceased trading, you need to notify the HMRC that it is now dormant for the purposes of corporation tax. According to the HMRC a dormant company can be;
- a new company that’s not yet trading
- an ‘off-the-shelf’ or ‘shell’ company held by a company formation agent intending to sell it on
- a company that will never be trading because it has been formed to own an asset such as land or intellectual property
- an existing company that has been, but is not currently, trading
- a company that’s no longer trading and destined to be removed from the Companies Register
It’s the last option here that applies to our clients. Fortunately, there is an online way to notify the HMRC that your company is now dormant for the purposes of corporation tax, and we suggest you send this to the HMRC once your final company accounts have been filed with them and any corporation tax due has been paid. This will ensure the processing of your dormant application will be straightforward.
You can keep a limited company dormant for as long as you want but here we are just looking at it as a further step needed to close the company.
Use the link below to do this;
Prepare your personal tax documentation
Now that all the required filings have been made with the HMRC, you need to extract all retained funds from your business, and close down your business bank account. There may also be a director’s loan account that will need to be wrapped up in any final distributions. It’s helpful to have all your personal tax documentation in one place because often there is a significant gap between closing a limited company and needing to report any distribution of funds on your personal tax return.
This documentation may include your P45, final dividend certificate, minutes of meeting to confirm the cessation of trade, and any capital gains calculations for any final distributions made taking the capital gains route.
MVL caveat. I just wanted to mention here that if you had significant retained earnings in your business and decided to close down using a members voluntary liquidation (MVL) then it’s the liquidator that will typically take care of closing your company tax accounts with the HMRC and preparing this personal tax documentation.
Closing the company with Companies House
This is the very last step involved in closing down your business, and once you get to this point you should have all your HMRC filings completed, all outstanding debts paid, all company funds should have been distributed to your personal bank account, and you should have your business bank account closed.
The easiest way to close your company is online with Companies House. The Companies House online service is quicker to complete than the paper form and has inbuilt checks to make sure your application is completed correctly. Plus, it’s cheaper to apply online. It costs only £8 and you can pay the fee using a debit or credit card.
The form you need to complete is called the DS01. This will strike off and dissolve your company with Companies House. The striking off process with Companies House takes around 3 months, and in this time it is absolutely critical that all bank accounts are closed. If any company bank account still has funds in it once the company is dissolved, your bank will freeze those funds and they cannot be accessed until the company is re-instated. Reinstatement of a company is costly and takes a LONG time.
To complete the DS01 form online with Companies House go to the gov.uk website and Apply to strike off and dissolve a company
Blocking a company from closing down
If all your company filings are up to date and all taxes have been paid, the process for closing down will be straightforward. When you apply to close your company with Companies House, the HMRC are notified and this is the most common barb for contractors. If filings are not up to date, or if the company owes money, the HMRC will block the closing of the company and will not allow it to proceed until taxes have been paid in full.
It’s also likely that if the company has outstanding loans, that the loan provider will block the closing of the company. Common creditors such as loan companies and the HMRC have systems in place to automatically check Companies House for applications to dissolve a company, and these days it is almost a certainty that companies with outstanding debts will be blocked from closing by the creditors. If this occurs you will be notified by post that the dissolution of the company has been blocked.
Need help closing your company?
As I mentioned at the start of this article, not only do we help existing clients close down their business as part of our normal accounting service, but we also provide this professional advice on a one-off basis for numerous other clients who approach us specifically with the request to close down their business. Usually this will be because they have done their own accounting up until this point, or have fallen out with their existing accountant. Either way we can take you through the full close down process and offer the value of our knowledge specifically around the tax efficient distribution of retained earnings.