Introduction -contractor close down limited company
As a limited company contractor, there will come a time when you need to consider the best way of closing a limited company UK. This may be due to the fact you have finished contracting or trading, so there is no longer a need for your company.
If you may return to contracting soon, you could alternatively consider making your company dormant. Your company will have minimal activity when you do this, and your accountant will usually charge you less for their services.
If you decide to close your company for good, you will need to consider the process for closing a limited company. As part of this, there are specific processes to follow as a director and shareholder. If you and your partner were the company officials it will be the case that you need to follow these processes as directors and shareholders. We will cover in more detail the processes and what you need to do later in this article.
Important to note that when you close your company, any final funds that remain in the company are payable to the business shareholders. The final pay-outs can be as dividends and/or as Capital Distributions. The distributions are payable when your company closes under a formal or informal liquidation (solvent liquidation).
Initial thoughts -closing a ltd company
There is a tax-efficient way to extract the final funds from your business as a limited company contractor. This comes by way of Capital Distributions. The business can make any final dividend or Capital Distribution payments in line with the shareholding ratio.
When an individual receives Capital Distributions from the closure of a company, these fall under the Capital Gains Tax rules. The individual will qualify for Entrepreneur’s Relief (ER) if certain conditions are met.
Qualifying for Entrepreneur’s Relief
The tax payable personally under Entrepreneur’s Relief is 10%. However, the director will only qualify for this if these two conditions are met:
- The director or officeholder has been a shareholder for two years before the company began closing down. Previously, the rule for this was one year.
- The company’s main activity during those two years has been trading (as opposed to investing).
It may be that your company ceases trading, and you find yourself in a position where your company cannot pay its taxes. In this scenario, there are different options to consider. Therefore, in this case, when we look at how to close a limited company, please look at the guidance below on an insolvent liquidation.
Dependent on how much funds remain (in a solvent company situation) when you close a limited company, there are two orderly ways to close this down.
Closing a ltd company -how long does it take?
When you decide to stop contracting or trading and look to close your business, how long does it take to close a limited company?
When it comes to considering close company liquidations, the time will vary depending on which route you take. Please read on for further details. If we go via the informal liquidation route it will take three months once the DS01 form is submitted to Companies House, assuming there are no objections from third parties. On the other hand, if you go via a formal liquidation the length of time could be several months or up to a year or even longer.
1) Formal liquidation–where the final funds in the business are more than £25K
When closing a limited company, this first method is handing the company over to an Insolvency Practitioner. Even though your company in this scenario will not be insolvent, the Insolvency Practitioner will become the company’s liquidator.
The liquidator will then:
- Liquidate all the company’s assets.
- Pay off all the creditors.
- Eventually, pay the balance left over to the shareholders.
To cover himself, the liquidator has to ensure he identifies and quantifies all of the company creditors. He will then make sure that he pays them.
The formal liquidation process will take several months, from start to finish. This is the case even in the most-simple of instances.
The average cost for a formal liquidation is around £3,000 plus VAT.
Please see the section titled `Members’ Voluntary (Solvent) Liquidation’ below. This goes into more detail with regard to the liquidators’ work and what this involves.
2) Informal liquidation –where the final funds in the business are less than £25K
When closing a ltd company, this method is when you reach the appropriate place in the process, you will fill out the Companies House form DS01.
For most simple companies, £10 versus £3,000 is a no-contest, but please read on.
Other tasks to complete when closing a ltd company
The company must pay its bills in either scenario (formal or informal liquidation). This includes VAT, PAYE/NIC bills, and other creditors. The VAT and PAYE schemes also need closing:
- The PAYE work will involve the completion of the final PAYE submissions and the issue of a P45 form. The company must also inform HMRC that the company is finishing and, therefore, the PAYE scheme needs to close.
- If the business is registered for VAT, the VAT closure involves de-registering for VAT. You can apply for this online via HMRC or via form VAT7 through the post. Once you submit the VAT de-registration, the business may need to file a final VAT return online.
The company needs to produce some financial accounts and a final company tax return (CT600). These will be filed with and processed by HMRC. This will take some time, although the HMRC website usually updates this after a few days.
The company will also need to pay its final Corporation Tax bill.
Next, you can then close the company bank account. You can do this with the help of a liquidator if you use the formal route. Alternatively, you will do this as the director if you go the informal way. Any funds that remain in the business are payable to the shareholder (s) as the Capital Distribution.
The cost of the shares in the contractor’s company is likely to be tiny.
Therefore, almost all of the final pay-out will be a Capital Distribution. A Capital Distribution is subject to Capital Gains Tax.
closing a ltd company -Capital Gains Tax
When you work out your Capital Gains Tax bill:
- You take the overall gain payable to you as a shareholder.
- Deduct the CGT annual allowance. This is so far as you do not need to use this against any other gains in the same tax year. This CGT allowance is £12,300 at present.
- You then arrive at the amount of gain subject to CGT.
If the director qualifies for ER, the rate of CGT payable on the Capital Gain will be 10%. ER is now called Business Asset Disposal Relief (BADR).
Notably, in the March 2020 Budget, the Lifetime Allowance when you claim Entrepreneur’s Relief changed. It decreased from £10 Million to £1 Million.
Companies House dissolves your company
It could be the case that your company does not file its annual accounts or Confirmation Statement on time. When this occurs, you could find that your company has been struck off the register by Companies House. As part of this, the company bank account is frozen too.
The results of this are:
- The funds in the company bank account go to the Crown.
- Any tax repayments due back to the company will no longer be repayable.
The director then needs to apply for company restoration to get the company restored. This is not a straightforward process, and there is a cost of £140.
Closing a ltd company -members’ Voluntary Liquidation (“MVL”) (Solvent)
Reasons for an MVL
An MVL is a procedure used when closing a solvent limited company. Shareholders may choose an MVL for one of many reasons:
- The company has no further purpose.
- The shareholders wish to retire.
- Peace of mind knowing the company has been closed down properly with limited chance of repercussions.
- It can be part of a larger restructure.
- To resolve shareholder disputes.
The MVL process allows for all creditors to be paid in full, together with statutory interest, within a 12-month period. The liquidator is appointed by the shareholders to finalise the company’s liabilities to creditors, realise any remaining assets and distribute funds to the shareholders.
The MVL process is started by the company’s directors, who must swear a Statutory Declaration of Solvency. This is done in front of a local solicitor. This is a basic balance sheet stating that the company is solvent and can pay its creditors in full (plus Statutory Interest where applicable) within a period of 12 months. The Declaration must be made by the majority of directors (or both if there are 2). The directors are further expected to convene a shareholders’ meeting to consider the resolutions to wind-up the company and appoint a Liquidator.
The swearing of the Declaration begins a 5-week window in which the shareholders must pass the appropriate resolutions. Failure to pass the resolution within these 5 weeks will render the Declaration obsolete, and a new Declaration must be sworn.
Upon passing the resolution to wind-up, the company formally enters Liquidation. The appointed Liquidator will then begin to wind down the company’s affairs.
Notice of the Liquidation and the appointment of the Liquidator will be sent to all shareholders and Companies House. An advert will also be placed in the London Gazette requesting that any creditors of the company inform the appointed Liquidator of their potential claim. This must be done within 30 days of the Notice. Any creditor failing to notify the Liquidator within this 30-day period will be expunged from any distribution.
Should a creditor claim be received and it transpires that the company cannot discharge its obligations in full, then the liquidation will convert to a CVL. This conversion may have possible consequences for the company’s directors.
Distributions to Shareholders
Upon expiry of the 30 days for creditors to submit their claims, distributions to the company’s shareholders can commence. There are two types of distributions to shareholders. The first is a physical distribution of assets over which the Liquidator has control. This primarily consists of the company’s cash (either by way of the company’s cash at the bank or cash held as a result of other asset realisations). The second is a distribution in specie and is used to distribute other tangible assets not physically held by the Liquidator. These may include freehold property, directors’ loan accounts, outstanding book debts, plant and machinery and office equipment etc. A distribution in specie can be undertaken on the date of Liquidation, and distributions to shareholders can be split over 2 tax periods to take advantage of their personal allowance.
HM Revenue & Customs Clearance
Once the company’s assets have been distributed, the Liquidator will correspond with HM Revenue & Customs. This is to request confirmation that all the company’s returns have been filed and that there is no liability outstanding. Once HM Revenue & Customs have confirmed the above, the case can be concluded.
The MVL process is typically completed in just under 12 months. As mentioned above, there is a requirement to receive HM Revenue & Customs clearance to conclude the case, and due to their current backlog, this takes around 12 months.
An alternative to an MVL may be to apply to Companies House to have the company removed from the Register. However, this is subject to strict conditions making an MVL the likely option, especially if the company has NET assets over £25,000.
Closing a ltd company -creditors’ Voluntary Liquidation (“CVL”) (Insolvent)
A CVL is the last port of call for closing an insolvent limited company which is struggling to pay its creditors. It should only be considered when all other avenues of refinancing and rescue have been exhausted. It will mark the end of the Limited company (although the business itself may be sold to another entity).
. It should only be considered when all other avenues of refinancing and rescue have been exhausted. It will mark the end of the Limited company (although the business itself may be sold to another entity).
The company directors start the CVL process. At a Board Meeting, the directors will resolve that the company is insolvent and that a meeting of the company’s shareholders should be convened. At the Shareholders’ meeting, two resolutions will be considered:
- That the company be wound-up voluntarily.
- That a liquidator be appointed.
Notice of the above is then sent to all members who are able to vote on the resolutions. Under The Companies Act, shareholders are entitled to 14 days’ notice of the shareholders’ meeting. This notice period may be shortened if 90% of the company’s shareholders agree to the same.
During the period between the director’s board meeting and the duly convened shareholders’ meeting, the directors are asked to prepare a Statement of Affairs (“SoA”). The SoA is normally prepared by the proposed Liquidator with the assistance of the company’s accountant. The contents are then Authenticated by the directors. The SoA is a basic balance sheet consisting of the company’s assets, liabilities, financial history and an explanation of the company’s demise.
On the day of the shareholders’ meeting, the resolutions are passed, and the company formally enters Liquidation.
Although the resolutions are passed by the shareholders, the appointment must be ratified by the company’s creditors. This is done at a duly convened creditors’ decision procedure. Typically, it will be Deemed Consent or a Virtual Meeting depending on the circumstances of the case. The creditor’s decision procedure is normally held on the same day as the meeting of shareholders. Notice of the creditors’ decision procedure will be signed at the director’s board meeting. The Notice will then be sent to the creditors of the company. Creditors are to be given at least 3 business days’ notice of the chosen creditor’s decision procedure.
Once appointed, the liquidator’s statutory duties include;
- Disposing of the company’s assets for the maximum achievable value. In most circumstances, an independent valuer will be used.
- Assisting those creditors with security over assets in recovering assets due to them. This can include leasing and hire purchase companies, suppliers with retention of title clauses for goods supplied that are not paid for and factoring companies holding security over the company’s book debts.
- Assisting employees of the company in recovering their statutory entitlements. These include unpaid wages, holiday pay, notice and redundancy.
- Investigating the conduct of the directors. A report will then be submitted to the Department for Business, Innovation and Skills, who will decide whether disqualification action against the directors is appropriate.
- The liquidator also has a duty to further investigate whether any transactions have taken place in the period leading up to liquidation that has been to the detriment of creditors.
The whole CVL process tends to take anywhere between 6- 12 months to complete depending on the complexity of the case.
It is also important to note that a CVL should not be confused with a Compulsory Liquidation. Although the end result may be the same, in that the company is wound-up, the procedures involved are very different. A Compulsory Liquidation is a creditor remedy against a company for not paying its liabilities. It is a process driven by the creditors with the assistance of the Court. A CVL is the result of a director acting in accordance with their fiduciary duty and instigating the winding-up process themselves.
Closing a limited company and starting a new one
Please note there are some anti-avoidance rules to be aware of here. We cover these in more detail within our article on `Entrepreneur’s Relief’.
When you look at how to close a company, you need to determine first of all if it is solvent or insolvent. You can pay all remaining company tax bills and other creditors if it is solvent. Once you do this, you can look in due course into how to distribute the final remaining balance.
The next step is to look at both the formal and informal liquidation methods. When you do this, you can check to see which one is the most cost-effective. As a result, you can then decide on which is the best route to take. Your accountant can help you here and ensure that you choose the best option when closing a Ltd company.
If you are taking the time to look into how to close your company, please feel free to make contact us via the website.
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