Considering the current and expected economic turmoil, alongside the end of Government support packages, you might be one of many owners and directors considering ways to close down your limited company.
During the early phase of the COVID-19 pandemic, many small business directors fell through the cracks of Government support. Tax-saving opportunities for directors paid via smaller salaries and dividends were welcome under normal circumstances. But unfortunately, this means your only option may have been to furlough yourself and cease working.
Aside from this, you could be one of many people for whom the lockdown and pandemic have prompted a rethink. You may be considering retirement, moving to alternative employment with a more stable income, or perhaps your business is simply no longer profitable under the “new normal” we hear mentioned so often.
Making this decision is likely to bring to the surface many different emotions, including frustration, anger and distress, but for some, it may also bring relief. Closing down your business certainly isn’t a decision taken lightly.
Is your company solvent or insolvent?
Depending on your circumstances, there are several methods you can take to close your limited company, and some requirements you must follow.
The method used to close down your company depends entirely on whether it can pay its bills (solvent) or not (insolvent).
My company can pay all of its debts – how do I close it down?
If your business is solvent and can pay its debts, there are two options:
1. Apply for the company to be struck off
This is usually the cheapest option. “Striking off” removes your limited company from the companies register and can be done when it is no longer required.
This isn’t an alternative to insolvency, and if a company has debts, creditors can ask for the company to be restored so that they can apply for a Creditors Voluntary Liquidation.
If your mind is made up, you should first set a date on which the company will be closed. Once you’ve done this, all the company’s outstanding supplier invoices must be settled, and if you have any outstanding customer invoices, you should make the effort to either collect payment or write them off.
Next, your accountant will prepare your final company accounts. They’ll then calculate the final amount of corporation tax, advise of any payments needed, and instruct you to empty and close down company bank accounts. They’ll also help you to close down any PAYE and VAT schemes you have with HMRC.
Finally, if the company has any domain names, these should either be cancelled or transferred.
Three months after the date the company stops trading, you can apply to have the company struck off the register by filling in the online DS01 form on the Companies House website. Companies House charge a business £10 (£8 if paid online) to dissolve a company.
Within seven days of applying to have the company struck off, the director of the limited company must inform any people associated with the company.
Associated people may include shareholders and members, other directors who have not signed the DS01 form, employees, creditors and guarantors, banks, suppliers, landlords and tenants, current personal injury claimants, managers or trustees of the employee pension fund (if applicable), and of course the DWP (Department of Work and Pensions) and HMRC.
Companies House will send a letter to the company’s registered address to verify that the application is genuine. If no objections are received, Companies House will go ahead and remove your company from the register.
2. Members’ voluntary liquidation
Members’ voluntary liquidation can be used when a company is solvent – i.e. its assets (including stock and cash in the bank) exceed its liabilities (taxes, suppliers owed, debts and directors funds) – and the shareholders wish to take out the businesses profits, also known as a “capital distribution”.
This results in the formal liquidation of the company.
I believe my company is insolvent –what are my responsibilities as a director?
There are two main tests to determine whether a company is insolvent; the cash flow test, and the balance sheet test.
- A company is cash flow insolvent if it cannot afford to pay its debts as and when they are due.
- A company which is balance sheet insolvent will have debts at a level which outweigh its assets.
If you believe your company is insolvent or will become so, you must take steps to limit the impact this will have on your outstanding creditors.
When a company is insolvent, no further credit should be agreed (i.e. a loan with a bank, a supplier credit account, or a company credit card), and you should be extremely careful when making payments to creditors if you don’t have sufficient funds to pay everyone you owe.
Choosing to pay one creditor over another may be classed as a “preference payment” and you could become personally liable for repayment of these amounts in a subsequent liquidation. Additionally, any assets or money belonging to the business should be safeguarded, not sold or transferred.
If you continue to trade whilst knowingly insolvent, you could find yourself being held personally liable. Instead, you should seek the advice and services of a licensed Insolvency Practitioner who will be able to talk you through the company’s options.
It’s their job to ensure you remain compliant in your duties as director of an insolvent company, reducing your risk of wrongful trading or wilfully incorrect or inappropriate behaviour by a company director.
A Creditor’s Voluntary Liquidation (CVL) brings an insolvent company to a close and deals with all outstanding company debts as part of the process.
While the value of the assets will be maximised to provide a return to creditors, there are still likely to be fewer funds available to completely pay all the debts of the company.
Any leftover debts will be written off upon the company being liquidated. The exception to this rule is for company debts which have been personally guaranteed by the directors of the business.
If you’ve signed a personal guarantee, the responsibility for paying the outstanding amount of this borrowing remains with you and won’t be written off.
What is liquidation?
Liquidation is a process whereby all the company’s assets are sold and the revenue from the sale is distributed to the company creditors before the shareholders.
There are three types of liquidation, but the same basic procedure applies to all types
First of all, you must appoint an insolvency practitioner as the liquidator, who assesses the company assets. This person is independent and has no links to the company. The assets are then liquidated (sold) and paid to the creditors in order of priority.
Outstanding taxes and secured lending take priority over unsecured creditors such as suppliers and shareholders. Shareholders then receive any surplus funds, and the limited company can be struck off.
The three types of liquidation:
- Member’s Voluntary Liquidation (MVL)
As mentioned above, an option for a solvent company to pay outstanding debts and distribute capital to shareholders.
- Creditor’s Voluntary Liquidation (CVL)
As mentioned above, when a company is insolvent – i.e. its liabilities (debts) are higher than its assets (stock and cash in the bank) – the assets (stock and equipment) are sold off to pay the company debts. Debts that cannot be paid off are written off, and the company is dissolved.
- Compulsory Liquidation
When a creditor (i.e. suppliers, banks or the HMRC) pays for a court order to force a company into closure. An “Official Receiver” or an appointed insolvency practitioner handles the process to liquidate the assets and pays off the debts of the company before it is dissolved.
Liquidation should only be considered as a last resort after all other avenues have been explored.
You can find more information on liquidating your limited company via the Gov.uk website.
I want to keep my company name – what can I do?
If you want to retain the business name (and maintain its visibility and perceived goodwill), or you’re unsure whether the business will begin trading again in the future, you can opt to make the company dormant.
A dormant company is essentially a “sleeping company”. This means it isn’t trading and has no significant transactions. It doesn’t pay corporation tax.
It’s worth noting that HMRC and Companies House have different definitions of “dormant”:
- Companies House – a company cannot have any significant accounting transactions during its dormant period, which means any transaction that needs to be entered into its accounting records.
- HMRC – a company cannot trade (generate income) or receive income from investments.
So, you could be dormant in HMRC’s eyes, but not in the view of Companies House.
Making a company dormant is the most sensible option when you’re not certain that you’re permanently ceasing to trade.
There are no time limits for how long a company is permitted to remain dormant, and to start trading again after a period of dormancy, all you need to do is inform HMRC that your company has started trading again within three months of doing so.
Companies House should be contacted as well, and you can do this within nine months of the company’s year-end date. Corporation tax should be settled in this same period, with company tax returns needing to be filed within twelve months of its year-end date.
Which option is the right one for closing down my limited company?
It’s not always the easiest decision for business owners, and no-one has a crystal ball to see what is coming in the next year.
However, if you’ve decided that making your company dormant is not the right choice for you, and you’re certain you won’t be trading again any time soon, you should consider whether you are going to strike off the company, or enter it into members’voluntary liquidation. Both have their pros and cons.
Member’s voluntary liquidation is more expensive, but it can work out more cost-effective if the company has over £25,000 worth of assets as they can be distributed and treated as capital gains. But it can be a long, drawn-out process, taking many months to complete.
Striking the company off is cheaper upfront and will take a maximum of three months, so is much quicker. But if the company has more than £25,000 worth of distributable assets these cannot be treated as capital gains.
With the Member’s Voluntary Liquidation, you may be able to claim Business Asset Disposal Relief (renamed from “Entrepreneurs Relief’”) to reduce your tax rate to 10%, instead of the usual income tax rates.
If a company has outstanding liabilities, creditors may object to it being struck off. And in the case of members’ voluntary liquidation, if creditors disagree with the decision of the licensed liquidator, they have 21 days in which to apply to the court to appeal it. Once a company goes into liquidation however, this decision is final and cannot be reversed.
As with all serious decisions relating to your business, we’d always recommend seeking the advice of financial and legal experts to work out the best options for you and your company.
You can also explore your options and find further guidance via a dedicated section on the Government’s website.