Closing a limited company in the UK -liquidating a limited company

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Introduction 

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 require careful thought. Indeed, when considering how to close my company, you’ll investigate a UK contractor company liquidation. Usually, deciding if I want to shut my company down and research company closure, is 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 to keep 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 plan to return to contracting soon, you could make your company dormant instead of considering how to close my limited company. Your company must have minimal activity and much fewer business transactions when you do this. As a result, your contractor accountant will usually charge you less fees. If you cease trading, limited company options are to keep it open temporarily or dissolve my company (UK). If you decide UK company liquidation is best, you should investigate the process for doing this. 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 company officials, you should follow the `close company procedure’ as directors and shareholders. This guide will go over this process and investigate the cost of liquidating a company later.

Initial thoughts when you dissolve a Ltd company 

How to liquidate a limited company?

This guide will examine how you close a Ltd company. We’ll also consider the processes involved in liquidating a limited company and 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 remaining in the company are payable to the business shareholders. Therefore, when dissolving a company (UK), the final payouts from company funds can be as dividends and/or as Capital Distributions. In summary, the distributions are payable when you cease trading a limited company under a formal or informal liquidation.

There’s a tax-efficient way to extract the final funds from your business as a UK company contractor when winding down a company. Indeed, when liquidating your business, this comes through 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. If certain conditions are met, the individual will qualify for Entrepreneur’s Relief (ER) as part of the company closure.

How do you qualify for Entrepreneur’s Relief when liquidating a limited company?

What tax is payable if working in IT, as many contractors do, and you undergo an IT contractor limited company liquidation? Under Entrepreneur’s Relief, the tax is payable personally under ER at 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 they begin 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).

Depending 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.

Some common phrases used when you close a UK company

In order not to confuse, there are several different phrases you can apply to closing a company. These all effectively mean the same thing, and when you’re 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 a limited company.
  • Wind down a company.

You may encounter many of these terms when researching how to dissolve a UK company. As we mentioned above, they all effectively mean the closure of a company.

The closing of a Ltd company process 

First thoughts when you’re liquidating a limited company 

When you decide to stop your contract work or trade and investigate 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 regarding the winding up processes.

When dissolving a limited company via the informal liquidation route, form DS01 can be used to apply to strike off the company from the register. Companies in liquidation in the UK will find it takes around three months to wind up the company officially. Indeed, the company is usually struck off the register around three months after you submit the DS01 to Companies House. This is on the assumption there are no objections from third parties. Furthermore, after this occurs, checking Companies House for your company record will show the official date the company closed down. On the other hand, how long does voluntary liquidation take through a liquidator? When winding up a company, if you go via a formal liquidation when you dissolve a company (UK), the time to complete the process is usually between 6 and 24 months. 

1) A 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 channels through which you undertake a formal liquidation. When you appoint a liquidation company (UK), they’ll advise you on the next steps. As part of this process, when you close a limited company, HMRC and Companies House are dealt with by the liquidator going forward. Also, even though your company won’t be insolvent in this scenario, the Insolvency Practitioner becomes 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 must identify and quantify all company creditors. He will then make sure he pays them. The formal limited company liquidation process (UK) takes several months from start to finish. Even in the simplest of instances, this is the case when dissolving a limited company formally. The average cost for a formal liquidation is around £4,000 plus VAT.

When liquidating a company (UK), please see the section below, `Members’ Voluntary (Solvent) Liquidation.’ This section on a contractor MVL goes into much more detail regarding the liquidators’ work and what work a voluntary liquidation (UK) involves. 

2) An informal liquidation where the final funds in the business are less than £25K 

If the final balance in your company is less than £25K, you can apply for a voluntary strike-off via a DS01 form. Therefore, when liquidating a limited company, you’ll fill out the Companies House form DS01 under the informal winding-up method when you get to this stage. When you apply to close the company, this form costs £10. You can close the bank account once you pay any final dividend and Capital distribution. Once these steps are complete, you can post the form and payment to Companies House. Besides the postal method, you can close a company online again by completing the DS01 form online.

As mentioned above, the cost of liquidating a company through the post is £44 for most simple companies. On the other hand, it’s £33 if you apply to close the limited company online via the Companies House website. Therefore, when considering how much it costs 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, that’ll involve looking at the final costs and tax on closing a company. These costs of liquidating a company (UK) are the final tax on dividends and Capital Distribution and 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. 

What other tasks should you complete when you dissolve a company?

HMRC has a basic guide of the tasks to complete when you strike off your limited company from the company register.

What do you do with assets when closing a business (UK)? 

As part of dissolving the company, the business will transfer the assets to the director at their then-market value. Furthermore, the director will pay 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 transferring to or from the company. 

Pay the company’s final bills 

When you’re winding up a company after contracting ceases, the business must pay its debts to interested parties. Therefore, the company must pay its bills for any outstanding amounts in either scenario (formal or informal contractor liquidation). Indeed, closing the limited company will include VAT, PAYE/NIC bills, and other creditors. You’ll also de-register the VAT and PAYE schemes as part of the company liquidation process.

Closing PAYE scheme

When you’re winding up the company, the final PAYE work will involve completing the last PAYE submissions and issuing a P45 form. The company must inform HMRC it’s finishing and then proceed with de-registering the PAYE scheme. If you use online software such as FreeAgent, you can tell HMRC 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 must deregister the VAT scheme. Therefore, VAT closure involves deregistering for VAT if the business has a VAT registration. You can apply online via HMRC or 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

As part of UK company liquidation, the company will likely have to produce a final set of contractor accounts and a final company tax return (CT600). Before you apply to close down the company, you’ll file these final documents with HMRC, and they’ll 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 pay its final Corporation Tax bill.

Close the business bank account 

Next, in the winding up of a limited company process, you can apply to close your contractor business bank accounts. You can do this with the help of a liquidator if you use the formal route. Alternatively, you’ll do this as the director if you go the informal way as part of liquidating a company (UK). When you close down a company, any remaining funds 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 payout is a Capital Distribution, subject to Capital Gains Tax.

More areas to consider 

Income Tax & Capital Gains Tax when liquidating a limited company 

If you take a final dividend as part of the closure procedure, you may owe some income tax. The final dividend can be reported on your personal tax return, and the tax will be paid to HMRC once you file this. What’s more, when you take a Capital Distribution as part of your UK contracting company close down, you’ll 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 was £6,000 in 2023/24; in 2024/25, it is now £3,000.
  • 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 is 10%. The new name for ER is now Business Asset Disposal Relief (BADR).

In the March 2020 Budget, the Lifetime Allowance (available when you claim Entrepreneur’s Relief) changed. This change officially decreased the Lifetime Allowance from £10 Million to £1 Million.

What happens if my company can’t pay its taxes?

It may be that your company is no longer contracting or trading, and you find yourself in a position where your company can’t pay its taxes. This could include your limited company cannot pay VAT or Corporation Tax. Certain options are available in this scenario before considering 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 insolvent liquidation. 

Companies House dissolve my limited company 

Before you wind up your company, it could be that you don’t file your annual accounts or Confirmation Statement on time. When this occurs, Companies House can 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 to restore the company. This isn’t a straightforward process and costs £468 or thereabouts.

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

Close a limited company and start a new one

You may be considering liquidating a company and starting again with a new company for several 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.’

Appoint 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 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 the company to pay all creditors in full, together with statutory interest, within 12 months. 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 12 months. The majority of directors (or both if there are 2) must swear the Declaration. 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 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 requesting 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 these 30 days 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 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 no liability is 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 struggling to pay its creditors. Company directors 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 entitled 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 shorter if 90% of the company’s shareholders agree to it.

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.

The resolutions are passed on the day of the shareholders’ meeting, and the company formally enters Liquidation.

Process -Creditors Involvement

Although the shareholders pass the resolutions, the company’s creditors must ratify the appointment. 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 creditors with security over assets and help recover 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 company’s employees in recovering 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 took 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 case’s complexity.

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 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 looking into closing down a limited company, first, you should determine its financial status. That’s to say, is it solvent or insolvent? If your UK contracting company is solvent, you can look at both the formal and informal liquidation methods as part of the winding up a company process. 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 route is best to take before liquidating a limited company. Your accountant can help you here and ensure 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 process, you can eventually investigate how to distribute the final remaining balance. Finally, if you’re taking the time to investigate company liquidation (UK) and require advice on dissolving the company, please feel free to contact us via the website.

Link to Contractor Advice UK group on

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

Published On: April 6th, 2024 / 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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