Closing a limited company in the UK

Introduction

As a business owner, there will come a time when you need to consider the best way of closing a limited company. When you do this, 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 down under a formal or informal liquidation (solvent liquidation).

Initial thoughts

There is a tax efficient way of extracting the final funds from your company. This comes by way of Capital Distributions. The business can therefore 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. If certain conditions are met, the individual will qualify for Entrepreneur’s Relief (ER).

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 held his or her shares for two years before the company began closing down. Previously, this used to be one year.
  • The company’s main activity during those two years has been trading (as opposed to investing).

It may be the case 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 looking at how to close a limited company, please have a look at the guidance below on an insolvent liquidation.

Depending on how much funds remain (in a solvent company situation), when you are closing a limited company, there are two orderly ways to close it down.

 1) Formal liquidation–where the final funds in the business are more than £25K 

This first method when closing a limited company involves handing the company over to an Insolvency Practitioner. Even though your company will not in this scenario be insolvent, the Insolvency Practitioner will become the company’s liquidator.

The liquidator would then:

  • Liquidate all the company’s assets.
  • Pay off all the creditors.
  • Pay himself of course.
  • Eventually, pay the balance left over to the shareholders.

To cover himself, the liquidator has to take steps to make sure 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 cases.

The average cost for a formal liquidation is around £3,000 plus VAT.

Please see the section below titled `Members’ Voluntary (Solvent) Liquidation’. This goes into more detail with regards to the liquidators’ work, and what this involves.

2) Informal liquidation –where the final funds in the business are less than £25K 

This method, when closing a limited company, involves when you reach the appropriate place in the process, you will fill out 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 down a limited company

In either scenario (formal or informal liquidation), the company will need to pay its VAT and PAYE/NIC bills. The VAT and PAYE schemes will also need closing down:

  • For the PAYE work, this will involve completing the final PAYE submissions and issuing a P45 form. The company also needs to inform HMRC that the PAYE scheme needs closing down.
  • If the business is VAT registered, the VAT closure will involve de-registering for VAT. This can be applied for online via HMRC or via form VAT7 through the post. Once the VAT de-registration has been submitted, the business may need to file a final VAT return online.

The company will need to produce some financial accounts and a final company tax return (CT600). These will then need filing with and processing by HMRC. This will take some time, although usually the HMRC website will update 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 will be subject to Capital Gains Tax.

Closing down a limited company -Capital Gains Tax   

When you work out your Capital Gains Tax bill:

  • You will 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 will then arrive at the amount of gain that is 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 for claiming Entrepreneur’s Relief changed. It was decreased from £10 Million to £1 Million.

Your company is dissolved by Companies House

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 Companies House have struck the company off. As part of this, the company bank account is then frozen too.

The results of this are:

  • The funds in the company bank account will go to the Crown.
  • Any tax repayments due back to the company will no longer be repayable.

In order to get the company restored, the director will need to apply for company restoration. This is not a straightforward process and there is a cost of £140.

As part of the restoration, the company will need to file annual accounts and the Confirmation Statement in paper form. Once the fee has been paid and the documents have been filed, Companies House will put the company back on the Public Register. The funds in the company bank account will then be available again.

Members’ Voluntary Liquidation (“MVL”) (Solvent) 

Reasons for an MVL 

An MVL is a procedure used to close a solvent 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.
  • Tax purposes.

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.

Process 

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.

Post Appointment

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.  

Possible Consequences

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 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 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.

Alternative Option

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.

Creditors Voluntary Liquidation (“CVL”) (Insolvent)

A CVL is the last port of call for a struggling company. 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).

Process

The CVL process is started by the company directors. 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 2 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 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 creditors 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.

Post Appointment

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.

Final thoughts

When you look at how to close a company, you need to determine first of all if it is solvent or insolvent. If it is solvent, you should pay all remaining company tax bills and any other creditors. Once you have done this, you can look in due course into distributing 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 make a decision on which is the best route to take. Your accountant can help you here and make sure that you choose the best option when closing a Ltd company.

If you are looking to close your company, please feel free to make contact via the website.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: March 15th, 2021 / Categories: Closing Your Company, Member Only Articles (Technical!) /

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2 Comments

  1. Paul Clark February 25, 2020 at 10:09 am - Reply

    A really interesting read

    • scott291074 February 25, 2020 at 7:50 pm - Reply

      Thanks Paul.

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