Liquidating a limited company as a UK contractor

Introduction -contractor close down limited company 

As a UK company contractor, you may be closing your business therefore you’ll research liquidating a limited company. When you do, you’ll research the best way of winding up a company. As a contractor (UK), closing company options need careful thought. Indeed, when considering how do I close my company, you’ll look into a UK contractor company liquidation. Usually, if you decide I want to shut my company down and research company closure, it’s because the business is finishing UK contracting or trading. Therefore, the contractor ending their company will shut it down for good, as there’s no longer a requirement for it. When this time comes, you’ll research the most tax-efficient ways of closing a company (UK). In this guide, we’ll research closing my limited company and the company closing procedure. As a result, we’ll see what to consider as part of the closing a limited company process.

If you may return to contracting in the near future, instead of considering how to close my limited company, you could make your company dormant. When you do this, your company will have minimal activity and less business transactions. As a result, your accountant will usually charge you less fees. If you cease trading, limited company options are to keep it open for the meantime or dissolve my company (UK). If you decide that UK company liquidation is best, you should consider the process for closing a limited company (UK). As part of closing a company (Companies House), there’s a specific routine to follow as a director and shareholder. Therefore, if you and your partner are the company officials, you should follow the close company procedure as directors and shareholders. We’ll go over the process of contractor closing limited company and cost to liquidate a company later in this guide.

Initial thoughts on dissolving a ltd company 

How to liquidate limited company

In this guide, we will look at how do you close a ltd company. We’ll also consider the processes to carry out when you are liquidating a limited company. In addition, we’ll also look at what is the tax on winding up a limited company.

When looking at how to liquidate a limited company, it’s key to consider the remaining funds when you dissolve it. Basically, when you’re liquidating a limited company (we can also call this winding up a company), any final funds which remain in the company are payable to the business shareholders. Therefore, when dissolving a company (UK), the final pay-outs from company funds can be as dividends and/or as Capital Distributions. To summarise, the distributions are payable when you cease trading a limited company, under a formal or informal liquidation.

There is a tax-efficient way when winding down a company, to extract the final funds from your business as a UK company contractor. Basically, when closing down a company (UK), this comes by way of Capital Distributions. As part of ending a company, the business will make any payments for a final dividend and Capital Distribution on closing a company down 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. 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

If working in IT, as many contractors do, and undergo an IT contractor limited company liquidation, what tax is payable? Under Entrepreneur’s Relief, the tax is payable personally under ER a rate of 10%. However, when closing your company, the director will only qualify for ER if two conditions are met:

• The director or officeholder has been a shareholder for two years before he/she begins the UK company liquidation 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).

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 for your limited company close down.

Different phrases that mean close a company

In order not to cause confusion, there’s several different phrases you can apply to closing a company. These all effectively mean the same thing and, when you are shutting down a ltd company, they include:

• Closing the company.

• Dissolve a ltd company.

• Folding a company.

• Liquidating the company.

• Shut down a limited company.

• Wind up limited company.

• Wind down a company.

When you research how to dissolve a UK company, you may come across many of these terms. As we mention above, they all effectively mean the closure of a company.

Common questions

When a contractor or other business owner plans on liquidating a ltd company, they will no doubt have some questions. Some examples of such questions on how to close down a company may include:

• How do I close my limited company?

• How long does it take to liquidate a limited company?

• Do I need to close my limited company down if I am captured by IR35?

• How to close a limited company down?

• How much does it cost to close a limited company?

• What are the consequences of liquidating a company?

• How to pay the least tax closing a limited company?

• How to wind up a limited company?

In this guide, we’ll take a look at how to close a company down. We’ll also look at the various things to think about as part of liquidating a business.

The closing a ltd company processes and how long does this take

What to consider first when you are liquidating a limited company 

When you decide to stop your contract work or trade and look into closing a business (UK), how long does it take to close a limited company? Basically, in terms of close company liquidations, the time for limited company closure will vary and this depends on which liquidating limited company route you take. Please read on for further details with regard to the closing ltd company processes.

You will use form DS01 when dissolving a limited company via the informal liquidation route. Companies in liquidation in UK will find it takes around three months to officially wind up the company. Indeed, the actual official closure happens around three months after we submit the DS01 to Companies House. This is on the assumption that there are no objections from third parties. Furthermore, after this takes place, if you check Companies House for your company record, it will show the date that the company closed down. On the other hand, how long does voluntary liquidation take through a liquidator? Basically, when winding up a company, if you go via a formal liquidation when you dissolve a company (UK), the length of time to complete the process is usually between 6 and 24 months.

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

When you’re winding up a limited company, the first method is to hand the company over to a Licensed Insolvency Practitioner. The professionals are effectively known as liquidation companies (UK) and are the official channel to go through when you undertake a formal liquidation. When you appoint a liquidation company (UK), they will advise the next steps. As part of this process when you’re closing a limited company, HMRC and Companies House will be dealt with by the liquidator going forward. Also, even though your company in this scenario will not be insolvent, the Insolvency Practitioner will become the company’s liquidator.

When you liquidate your company as part of the official dissolution 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 (UK) will take several months, from start to finish. When you are dissolving a limited company formally, this is the case even in the most-simple of instances. The average cost for a formal liquidation is around £4,000 plus VAT.

With regard to liquidating a company (UK), please see the section below `Members’ Voluntary (Solvent) Liquidation’. This section on a contractor MVL goes into much more detail with regard to the liquidators’ work and what work a voluntary liquidation (UK) 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. The cost for this form when you apply to close the company is £10. Once you pay any final dividend and Capital distribution, you can close the bank account. Once these steps are complete, you can post the form and payment on to Companies House. Besides the postal method, you can also close a company online, again by completing the DS01 form.

For most simple companies, as we mention above, the cost of liquidating a company through the post is £10. On the other hand, it is £8 if you apply to close limited company online via the Companies House website. Therefore, when we consider how much does it cost to liquidate a company (UK), this nominal fee, versus £4,000 is a no-contest, however please read on.

When winding up a ltd company, a further thought for a UK contractor is what is the cheapest way to close a limited company? As a result, this will involve looking at the final costs and tax on closing a company. These costs of liquidating a company (UK) will be the final tax on dividends and Capital Distribution, as well as the formal liquidation costs. Therefore, if your current balance is above £25K, it may be less costly to pay a dividend at such a level, to bring the final balance in the company under £25K. By doing so, your company can then go through the informal liquidation process.

Other tasks to complete when dissolving a company

What to do with assets when closing a business (UK) 

As part of dissolving the company, the business will transfer the assets in the company to the director at their then market value. Basically, the director will pay to the company the value of the assets, although this is usually a transfer to the director’s loan account. Indeed, as part of dissolving the company, the business owner can settle the final director’s loan account balance by a transfer to or from the company.

Pay your final bills 

When you are winding up a company after your contracting ceases, the business must pay its debts and any outstanding bills in either scenario (formal or informal contractor liquidation). Indeed, when closing the limited company, this will include the VAT, PAYE/NIC bills, and other creditors. As part of the company liquidation process, you will also re-register the VAT and PAYE schemes.

Closing PAYE scheme

When you’re winding up the company, the final PAYE work will involve the completion of the last PAYE submissions and the issue of a P45 form. The company must also inform HMRC that the company is finishing and then go ahead with de-registering the PAYE scheme. If you use online software such as FreeAgent, you can inform HMRC that the company is finishing and apply to close the PAYE scheme as part of the final PAYE submission.

De-register for VAT

When you close down a limited company, you will need to de-register the VAT scheme. Therefore, 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. In addition, 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 UK company liquidation. Before you apply to close down the company, you will file these final documents 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 business bank account 

Next in the winding up a limited company process, you can apply to close the business 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). Key to note, when you close down a company, any funds that remain in the business are payable to the shareholder(s) as the final 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).

In the March 2020 Budget, the Lifetime Allowance when you claim Entrepreneur’s Relief was changed. This change saw an official decrease from £10 Million to £1 Million for the Lifetime Allowance.

My company cannot pay its taxes

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. This could include your limited company cannot pay VAT or Corporation Tax. 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 liquidation (UK), please look at the guidance below on an insolvent liquidation. 

Companies House dissolve my limited company 

Before you come to winding up your company 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 

You may be considering liquidating a company and starting again with a new company for a number of reasons. However, there are some anti-avoidance rules to be aware of when you close a company down. Therefore, if you’re winding up your company), we cover these in more detail within our guide 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. 

Process

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. 

Post Appointment 

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.

Possible Consequences 

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. 

Alternative Option

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. 

Post Appointment

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.

Please Note

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. 

Final thoughts

When you’re 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 company process, you can look at both the formal and informal liquidation methods of dissolving a UK 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 before liquidating a limited company. Your accountant can help you here and ensure that you choose the best option when winding down your 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 liquidation (UK) and need advice on dissolving the company, please feel free to make contact us via the website.

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