Introduction -contractor close down limited company
As a UK company contractor, there will come a time when you will be considering what is the best way of liquidating a limited company. When you are looking into a UK contractor company liquidation, the reason for looking into company closure may be due to the fact that you will be shortly finishing UK contracting or trading. As a result, there is no longer a requirement for your company. When this time comes, you will look into the best way of closing a company.
If you may return to contracting soon, instead of taking a look at how to close my limited company, you could alternatively consider making your company dormant. Your company will have minimal activity when you do this. As a result, your accountant will usually charge you less for their services.
If you decide that company closure is the best option, you should consider the process for closing a limited company (UK). As part of closing a company, 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 should follow the necessary close company procedure as directors and shareholders. We will cover in more detail the contractor closing limited company processes and what you should do later in this article.
How to liquidate limited company
In this article, we will look at how do you close a ltd company. We will also consider the processes to carry out when you are closing down a ltd company. In addition, we will also look at what is the tax on winding up a limited company.
When we look at how to liquidate a limited company it is key to consider what funds are left in the company. Basically, when you are liquidating a limited company (this is also known as winding up a limited company), any final funds that remain in the company are payable to the business shareholders. Therefore, as part of dissolving a company (UK), the final pay-outs of the remaining company funds can be as dividends and/or as Capital Distributions. To sum up, the distributions are payable when you cease trading a limited company under a formal or informal liquidation.
There is a tax-efficient way when closing a company, to extract the final funds from your business as a UK company contractor. Notably, when closing down a company, this comes by way of Capital Distributions. The business can make any final dividend or Capital Distribution payments in line with the shareholding ratio before ending a company.
When an individual receives Capital Distributions from the closure of a company, these fall under the Capital Gains Tax rules. As part of company closure, the individual will qualify for Entrepreneur’s Relief (ER) if certain conditions are met.
Liquidating a limited company -qualify for Entrepreneur’s Relief
When you undergo a contractor limited company liquidation, the tax is payable personally under Entrepreneur’s Relief at a rate of 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 he/she begins the company closure process. 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 is no longer UK contracting or trading, and you find yourself in a position where your company cannot pay its taxes. In this scenario, there are different options to think about before you can consider shutting down a limited company. Therefore, in this case, when we look at the process of company closure, please look at the guidance below on an insolvent liquidation.
Dependent on how much funds remain [in the case of winding up a solvent company (UK)], when you choose to go ahead with winding down a company, there are two orderly ways to close this down.
The closing a ltd company processes and how long it takes when liquidating limited company?
What to consider first
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 for company closure will vary depending on which route you take. Please read on for further details with regard to the closing ltd company processes.
When we are winding up a limited company, If we go via the informal liquidation route it will take three months once we submit the DS01 form to Companies House, on the assumption that there are no objections from third parties. On the other hand, when winding up a limited company, 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 (UK), the first method is to hand 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.
As part of the official company closure process, the liquidator will 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 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. When you are winding up a limited company formally, this is the case even in the most-simple of instances. The average cost for a formal liquidation is around £3,000 plus VAT.
With regard to liquidating a company (UK), please see the section below `Members’ Voluntary (Solvent) Liquidation’. 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 liquidating a limited company, the informal winding up method is when you reach the appropriate place in the process, you will fill out the Companies House form DS01.
For most simple companies, the cost of closing a company through the post is £10. Alternatively, it is £8 if you apply to close the company online via the Companies House website. This nominal fee, versus £3,000 is a no-contest, however please read on.
Other tasks to complete when closing a ltd company
Pay your final bills
When you are winding up a limited company after your contracting ceases, the company must pay its bills in either scenario (formal or informal liquidation). This will include the VAT, PAYE/NIC bills, and other creditors. As part of the liquidating a company (UK) process, you will also close the VAT and PAYE schemes.
Close PAYE scheme
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.
De-register for VAT
If the business had a VAT registration, 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 have to file a final VAT return online.
Prepare and file final accounts
The company will more than likely have to produce some financial accounts and a final company tax return (CT600) as part of company closure. You will file these with HMRC and they will process them. This will take some time, although the HMRC website usually updates this after a few days. As part of the contractor (UK) closing company process, the company will also pay its final Corporation Tax bill.
Close the company bank account
Next in the company closure process, 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 as part of liquidating a company (UK). 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.
Other areas to consider
Liquidating a limited company -Capital Gains Tax
When you take a Capital Distribution, as part of your UK contracting company close down, you will eventually work out your Capital Gains Tax liability when you complete your Self-Assessment tax return:
- You take the overall gain payable to you as a shareholder.
- Deduct the CGT annual allowance. This is so far as you do not have to use this against any other gains in the same tax year. The CGT allowance is £12,300 in 2022/23 and £6,000 in 2023/24.
- 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%. The new name for ER is now 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 decide to dissolve your company
Before you come to liquidating a company (UK) yourself, 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 strike your company off the register. 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 should then apply for company restoration in order to restore the company. This is not a straightforward process and there is a cost of £140.
As part of the restoration, the company has to file annual accounts and the Confirmation Statement in paper form. Once the fee has been paid, and the documents are with Companies House, they will put the company back on the Public Register. The funds in the company bank account will then be available again.
Closing a limited company and starting a new one
There are some anti-avoidance rules to be aware of when you close a company down. If you are liquidating a company (UK), we cover these in more detail within our article on `Entrepreneur’s Relief’.
Appointing a Liquidator (for either a solvent or insolvent liquidation)
Liquidating a Limited Company – Members’ Voluntary Liquidation (“MVL”) (Solvent)
Reasons for an MVL
An MVL is a procedure which a director can use 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 closes down properly with limited chance of repercussions.
- It can be part of a larger restructure.
- To resolve shareholder disputes.
- Tax purposes.
The MVL process will allow for the company to pay all creditors in full, together with statutory interest, within a 12-month period. The shareholders appoint the Liquidator to finalise the company’s liabilities to creditors, realise any remaining assets and distribute funds to the shareholders.
The company directors start the MVL process and must swear a Statutory Declaration of Solvency. They do this in front of a local solicitor. This is a basic Balance Sheet which states 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. With the Liquidator now in office, they 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. The Liquidator will also place an advert in the London Gazette which requests that any creditors of the company inform the Liquidator of their potential claim. This must be done within 30 days of the Notice. Any creditor who fails to notify the Liquidator within this 30-day period will be expunged from any distribution.
Should the company receive a creditor claim and it transpires that it 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 the liquidator uses this 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
Upon appointment 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. Best practice dictates that the liquidator must obtain HM Revenue & Customs clearance prior to concluding the case.
The whole MVL process typically takes 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 remove the company 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.
Liquidating a Limited 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. Directors of a company should only consider this when no other avenues of refinancing and rescue are available. It will mark the end of the Limited company (although the business itself may be sold to another entity).
Process – Directors/Members Involvement
The company directors start the CVL process. At a Board Meeting, the directors will resolve that the company is insolvent and that they will convene a meeting of the company’s shareholders. At the Shareholders’ meeting, two resolutions will be put forward:
- 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, it entitles shareholders to 14 days’ notice of the shareholders’ meeting. This notice period may be shorter 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 will prepare a Statement of Affairs (“SoA”). They prepare this with the assistance of the proposed Liquidator and the company’s accountant. The directors will then Authenticate the content. 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.
Process – Creditors Involvement
Although the shareholders pass the resolutions, the appointment must be ratified by the company’s creditors. This is done at a duly convened creditors’ decision procedure. Typically, it will be by Deemed Consent or a Virtual Meeting and this will depend 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. Further, the Notice will give the creditors at least 3 business days’ notice of the chosen creditor’s decision procedure.
Once in office, the liquidator has certain statutory duties such as;
- Organise disposal of the company’s assets for the maximum achievable value. In most circumstances, an independent valuer will complete this.
- Assist those creditors with security over assets and help with the recovery of 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.
- Assist the employees of the company to recover their statutory entitlements. These include unpaid wages, holiday pay, notice and redundancy.
- Investigate the conduct of the directors. The liquidator will submit a report 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 one should not confuse a CVL with a Compulsory Liquidation. Although the end result may be the same, in that the company is wound-up, the procedures of each are very different. A Compulsory Liquidation is a creditor remedy against a company for not paying its liabilities. It is a process which is creditors take forward 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.
When you are looking into closing down a limited company, first you should determine its financial status. That is to say, is it solvent or insolvent. If your UK contracting company is solvent, then as part of the winding up a limited company process, you can look at both the formal and informal liquidation methods of closing a company. When you do this, you can check to see which method 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.
As part of a solvent company closure, your business will pay all remaining company tax bills and other creditors. Once you do this as part of the liquidating a company (UK) process, you can look in due course into how to distribute the final remaining balance. Finally, if you are taking the time to look into company closure, please feel free to make contact us via the website.
Link to Contractor Advice UK group on