Closing a limited company, whether it is solvent or insolvent, requires careful consideration of various tax and legal obligations. This guide provides an overview of the processes, costs, and tax-efficient strategies for closing a limited company.
Tax Considerations and Strategies
Having your limited company liquidated means your reserves are subject to capital gains tax (CGT) at 18% or 28%. But one of the major benefits of using a Members’ Voluntary Liquidation (MVL) is that it utilises Entrepreneurs’ Relief.
Preparation for closing a limited company includes securing losses, verifying liabilities, managing dividends, and paying attention to record keeping standards.
Costs and Methods of Winding Up
The costs of winding up a business differ depending on how the company is wound up. You’ll have to pay all remaining taxes and employee wages. Striking off a solvent company requires a charge to Companies House, whereas an MVL will entail a liquidator’s charge, typically ranging from £1,500 to £1,500 + VAT.
The two main methods of closing down a solvent limited company are Voluntary Strike Off and Members’ Voluntary Liquidation (MVL).
However, deliberately avoiding essential tax liabilities and closing down without paying taxes can result in being pursued for tax evasion by HMRC. Taxes that may need to be paid include: Corporation Tax, Capital Gains Tax, Income Tax, VAT, and PAYE.
Making a company dormant can save on taxes, and using Business Asset Disposal Relief can minimise tax liabilities when closing a limited company.
A Voluntary Strike Off, also known as dissolution, is a common way of closing a limited company. This requires no recent trading or selling of stocks and no threats related to liquidation or arguments with creditors.
You usually need agreement to close a limited company. If it’s ‘solvent’, you either apply to get it struck off the Companies Register or start a members’ voluntary liquidation. Striking off is usually cheaper.
The main tax advantage of closing a company using MVL as opposed to Voluntary Strike Off is that the distributions of retained profits are subject to CGT. MVL distributions are not differentiated above or below £25,000.
Formal Strike-Off is advisable if retained earnings are less than £25,000. Closing using an MVL could be the most efficient option, offering a quick process and potential tax savings.
Process of Closing Your Limited Company
Closing your limited company is also known as winding up or dissolution. This can be a complex process, often requiring the guidance of a professional.
Solvent vs. Insolvent Company Closure
If the company is insolvent, the interests of creditors legally come before those of directors or shareholders. Liquidation is required in such cases.
Ways to Close Down
There are two main ways to close down a Limited Company:
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Strike off – A simple application to Companies House. It’s cheaper but slower and creditors can resurrect the company later.
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Liquidation – Requires a qualified insolvency practitioner. It’s quicker but more expensive.
Up until 1 March 2012, funds paid out to the shareholders during striking off were taxed as a dividend, while those paid out as part of a liquidation were subject to capital gains tax (CGT).
Closing a non-trading limited company is more straightforward and requires agreement from all directors and shareholders.
To initiate the closure of a company, you must decide to dissolve it, alert government bodies, file final tax returns, and notify creditors.