There may come a time when you need to make the difficult decision to close your limited company. Yes it can be straight forward to do so, however there are a number of variables to consider. In this article we provide a complete overview on how to successfully close your company, when simply closing your limited company isn’t the most tax efficient and when to consider using an MVL (Member’s Voluntary Liquidation) provider.
So, lets start with the most important question. . .
Before closing your company, have you considered all your options?
There are some things you could alter to enable you to continue trading. So worth baring these in mind before beginning the closure process.
Change trading status and switch from a limited company to umbrella company.
Umbrella companies are considered one of the easiest ways for temporary workers to get paid. Dependent on your IR35 status your limited company may no longer be the most tax efficient way for you to work, for now. Using an Umbrella company means you will remain compliant with all the tax laws, and your tax and NI will be deducted at source on your behalf.
Making the company dormant.
There is no time limit for keeping a company dormant as long as you keep your annual returns and accounts up to date with Companies House each year. Accountancy fees are also significantly less as you are not actively trading.
You can also keep your limited company dormant whilst contracting through an umbrella company. This gives you the best option to return to your company, hopefully, in the future. Our Easy Switch package allows contractors that flexibility to switch between both limited and umbrella to suit your latest contract, all for no extra fee. Click the following link to find out more about our Easy Switch accountancy and payroll package.
Are you switching to permanent work – if so, is this short term?
If it is, you might want to consider leaving your limited company dormant so that you can easily and quickly return to it when your permanent position comes to an end. Once your company is closed you may not be able to register a new company for two years. So bare that in mind.
Be certain – it can be costly if you reconsider at a later date.
If you’re not 100% sure, opt to make the company dormant, that way you’ll avoid unnecessary costs further down the road.
So, you’re ready to close your company. What is the best way to do so?
The most two common choices are; to close your company yourself or acquire the services of a liquidation practitioner for an MVL.
To qualify for an MVL you must have reserves in the company of over £25,00 saved in your companies’ bank account. Through an MVL the shareholder would benefit from from the Business Asset Disposal Relief (formerly Entrepreneurs’ Tax Relief), taxed at only 10% as a capital gain.
If the shareholder has over £25,000 and decides to close the company themselves, then the funds will be treated as dividends income, meaning they will be taxed on the shareholder as dividends at 38.1% (2021).
Naturally there are costs to using an MVL however further detail of this and a detailed breakdown can be found here: FAQ’s on MVL’s.
Standard Limited Company Closure
You can do this yourself and will mean that your company is struck off from Companies House. This is only tax efficient if your profits are under £25k. Also known as dissolution, you’ll need to complete a DS01 form (signed by all directors) and send it to Companies House. You should also advise any shareholders, creditors, and employees within a week of submitting that form.
It is worth noting here that, to apply for closure, your company cannot have any of the following:
- Traded or changed its name in the previous 3 months.
- Has not been threatened with liquidation.
- Has no current creditor agreements.
- Has no outstanding debts or taxes.
If you cannot meet the above criteria you will need to voluntarily liquidate instead.
Assuming there are no objections, your company will be dissolved within 2-3 months and ‘struck off’ Companies House register, meaning it no longer exists. The cost for doing this is £8 if submitting online, or £10 via paper form. Final statutory accounts and a company tax return must be sent to HMRC.
Make sure that any business assets, such as cash in the bank account, are shared amongst shareholders before the company is struck off otherwise anything that is left will go to the Crown.
Even after you have closed your company you must keep business documents for 7 years, this included bank statements, invoices and receipts.
Member’s Voluntary Liquidation (MVL)
An MVL is a liquidation process available to solvent companies, enabling the shareholder/s to appoint a liquidator to formally close down their company and can be the most tax-efficient method. Instead of being charged income tax, this way shareholders can obtain the value of the company via a capital gain.
A licensed insolvency practice is appointed and they will realise the company’s assets, pay any outstanding creditors and then distribute any remaining sums to shareholders. With an MVL, your company must have paid (or be able to pay) all creditors and liabilities within 12 months of liquidation.
A MVL will not affect your credit rating in any way, it is a formal wind up process for a solvent company, not an insolvent company.
If you want to go down this route, the majority of directors (75%) must sign a declaration of solvency and pass a resolution for voluntary winding up. This resolution will then be published within 14 days and during this period you must inform Companies House of your decision. Once an authorised insolvency practitioner is appointed, they will take charge of the limited company. This is undeniably a more laborious process than Standard Closure but will most likely be well worth it for the potential tax saving you’ll receive.
And finally, if I close my company, do all my outstanding ‘debts’ get written off?
This is a common misconception. A business must be solvent before it can be struck off and have repaid all the money it owes. Ultimately, if you close your company, Companies House will provide public notice of the closure and if there is tax and outstanding debt, these will need to be cleared prior to closing.
As with all important company decisions, speak to the experts. Lean on your accountant on what they feel financially is the best route for you to take, even at this stage their professional advice could make a big difference in financial terms.
For all insolvency queries, we recommend industry leading experts SFP. They’re team of experts ensure they release 90% of your assets within 7 days and provided you a dedicated account manager from start to finish. Find out more about SFP here or contact your accountant to start your MVL process: SFP-MVL.
You can speak to on of our fully qualified accountants on 0207 096 2659 or email christian@integroaccounting.com – alternatively you can complete our request a call back form where we call you at a time convenient to you.