How To Close A Limited Company in the UK? What are your Options?
Why Close A Company?
In recent years, many new start-ups have been met with a swift demise due to the global pandemic that has engulfed the world in chaos and financial instability. Under these circumstances, almost 24.3% of the businesses in the UK have temporarily or permanently closed down, with an estimated 900,000 firms failing and closing down in the middle of 2021, with many business survival and support programs expiring. Clear House Accountants are helping such businesses with smart solutions to increase business longevity. However, If it’s inevitable for you, read this guide to close a company effectively.
Signs That You Need To Close Your Limited Company
Setting up a limited company is tough, but closing one is even more challenging. This is why you need to be absolutely sure that your company needs to be closed down. Not only would a timely closure save you a lot of money, but it can also protect you from incurring more liabilities while forcing your business to stay afloat. If you are a business owner in the UK, especially during these trying times, you need to be on the lookout for these few signs that may be a testament to whether it is time for you to close up shop and take out as much as you possibly can without losing too much money.
If you are a new startup, your survival in the industry depends on steady growth and increased market share. After putting considerable effort into your business development, if you still see no progress being made; it’s time to seize the process and try to locate the problem. And if the problems persist, we believe it would be a good choice to sell the business or close it up.
Cannot Break Even
As a new start-up thinking about making a profit would be an unrealistic goal. Your focus should be on breaking even and making up for all the capital injections as soon as possible. A business performs many forecasts in order to estimate the time of breakeven and the required revenue to achieve it. Suppose you see a significant deviation from the estimated projection of breakeven. In that case, you need to either develop a plan to increase your revenues or close up your business for good.
A business’s operation includes many different departments working together like a well-oiled machine to achieve a common final goal. If there is unnecessary friction between the departments working together, you need to take care of the problem and eliminate it vigilantly. A business where management instability persists over a long time would be like a ticking timebomb that could go under any moment’s notice. Under such circumstances, it would always be better just to close down the business.
Market Gaps and Trends
The business market is an ever-evolving entity that would require keeping a constant and sharp eye on the statistics and projections of the market. The business model and plan you have decided upon might become obsolete by the time you truly enter the market. The market gap you had found and decided to target might get addressed before you have a chance to. If you do not have contingency plans set in place to deal with these problems, we’d suggest you close up shop before you make panicked decisions that end up harming your financial health even further.
You Cannot Hold Onto Your Employees.
Human resource is one of the most critical assets that can help make or break your business empire. A set of skilled employees can take a business to the next level, but if such employees are starting to leave your business for other places, you need to step up your game and provide them with better benefits and packages. Good employees are the backbone of a company, especially as a start-up as skilled employees are harder to come by. If you cannot hold onto your employees, it’s always a good idea to close up and start fresh.
These are some of the signs that you need to be on the lookout for to find out if your business can continue to grow and survive or if it is time to close down your limited company.
Take Care Of Your Responsibilities First
Closing down your business is a very arduous process; after making sure that there is no saving the company and there is nothing more that can be done other than closing down the business, it is time to take care of all the responsibilities as a director or shareholder and due diligence that need to be done before you can proceed with the business closure. This would allow you to save yourself the troubles that these responsibilities may cause you later in the process.
Informing The Concerned Parties
The first step you need to take is to inform all the involved parties of your decision to close down your limited company. These parties include,
- The HMRC
- The business insurer
- The company’s bank
- Accountants and other advisers.
As the decision to close down the company would not be finalised without the consent of the shareholders and directors, they would be aware of the entire process. The HMRC needs to be notified to proceed with the taxation process. In contrast, the company’s bank and accountants must be made aware as stated by the law and make it easier on yourself while producing final financial statements.
After the company has decided to seize trading, you need to notify the HMRC of the decision you can get yourself unregistered from paying VAT. After submitting the request for deregistration, the HMRC will provide you with a straightforward questionnaire that you can answer and get yourself unlisted. You should also notify the Inspector of Taxes for the company’s payroll regarding the decision to close up so that the HMRC can issue a final P35 Employer’s Annual Return that you would need to file. After that, you would need to file up for corporation tax one last time with the HMRC. You need to visit or contact these departments individually and make sure they know of your closure before moving forward with the procedure.
Paying off Debts & Salaries
The next step is to pay off any debts or salaries that the company might owe. Any payments due to the HMRC are also to be made from the company’s accounts as failure to pay off these responsibilities might result in the company being declared insolvent. If you are left with remaining assets that can be liquidated after paying off all the liabilities, they can be used to pay off a final dividend to your shareholders. Only after all the payments have been made, and there are no outstanding liabilities can a business’s accounts be closed, and you can proceed with the closing process.
Legal Status Of Your Limited Company
After taking care of all the due diligence and responsibilities, you can move on and understand the status of your limited company to choose the most suitable way of closing up the company. Your company’s position is determined by comparing liabilities and assets owned by the company and closing off some of the paths you could take when closing off a company. The following are the two financial statuses you could find yourself in at the time of closing.
When the assets owned by the company are more than the liabilities of the company, then the company is said to be solvent. Meaning the company can pay off its debts in all their entirety.
When the company cannot pay off its debts due to a more significant number of liabilities than assets owned by the company, it will be considered insolvent, which will cause considerable problems for the company at the time of winding up. To save your company from insolvency, Read our complete guide on how to avoid company Insolvency.
The closing process for a solvent company is relatively easy as the company can be struck off of the company register for a very cheap cost, but if your company is insolvent, it might get a little complicated as the process of closing down a limited company that has been declared insolvent requires you to take a few additional steps to ensure you can get the job done.
Closing Down A Limited Company In Case Of Solvency
Closing down a limited solvent company is a very easy and straightforward process. However, you need to take care of a few formalities, but it’s nothing that would cause you any problems or would demand extra effort on your part.
If you want to close down a solvent company, you are presented with many options and can opt for whichever suits the situation and circumstances of your business the most. Provided that your company continues to be a going concern, you are presented with the following options.
- Members Voluntary Liquidation (MVL)
- Getting the company Struck Off
Members Voluntary Liquidation (MVL)
MVL is one of the most advised processes of liquidation if your company is considered solvent as it is a very formal method of closure and takes care of most of the formalities involved during the process.
If you are looking to close up business with MVL, the first thing you would need to do is declare your solvency if you are conducting business in England or Wales. A declaration of solvency needs to have the address of your business and the directors with their complete names. The declaration of solvency includes the amount of time your business would require to pay off its debts; the provided date cannot exceed more than 12 months after the day of liquidation.
After the declaration has been completed, the next step is to set up a meeting with your shareholders and decide on the company’s liquidation. For the motion of closure to be passed, you would need to have at least 75% of the shareholders agree to the liquidation. After this has been done, you need to hire a liquidity officer or practitioner to help convert your assets into cash, pay off all the liabilities, and give out dividends if there is a remaining balance. You are also required to advertise the closure in your local Gazette before submitting the necessary paperwork to Companies House.
MVL is the most suitable way of closing your business if your business can pay off its debts and the funds held by the company are more than £25,000 as it is one of the most tax-efficient ways of closing a business for directors.
Getting The Company Struck Off
Another option you have with closing a solvent company is to get your company struck off from the Companies House register. This is also known as an informal strike-off or voluntary strike-off.
However, to get your company struck off, you need to make sure you fit the required criteria that make you eligible for being struck off.
- Your company needs to be a going concern.
- Your company should be inactive for at least three months.
- Your company has not changed its name in at least three months.
- There are no company transactions in the last three months.
After making sure you fit the eligibility criteria to get your company struck off, you would need to take care of some formalities to further the process.
- Informing concerned parties at the HMRC of your decision.
- Settling all outstanding debts and credits.
- Preparing closing financial statements and filing the remaining tax concerns.
- Paying off any outstanding salaries.
To get started with the process of getting your company struck off, you will first submit a DS01 form application to notify the Companies House and your shareholders. If the notice is not met with any resistance or objections, the company will get struck off of the company register in the following two months. It costs a measly £10 to strike off a company, but the transaction cannot be made from a company owned account. However, it is essential to note that after the company is struck off, any assets remaining in the company’s possession are owned by the Crown by law, so ensure that you transfer and distribute all the assets amongst shareholders before submitting the DS01 form.
This closure process is suitable for a company that has been formed to achieve a short term goal after it has been completed and the assets held by the company account for less than £25,000.
How To Close A Limited Company In Case Of Insolvency?
If your company gets declared insolvent, you’re in for some hassle as the process of closing down gets a little more complicated in the case of an insolvent company. As the company cannot pay off its liabilities, only a few paths the company could take to wind up the company.
- Creditors Voluntary Liquidation (CVL).
- Compulsory Liquidation.
Creditors Voluntary Liquidation (CVL)
A creditors’ voluntary liquidation is imposed on the company by itself when the company cannot pay off its debts and has decided to liquidate the company to pay its liabilities. To move for liquidation, the directors need to,
- Call in a meeting with the shareholders, and at least 75% of the shareholders need to agree to the liquidation.
- Appoint a professional liquidator to take charge of the process and the company.
- Submit a resolution of liquidation to the Companies House within 15 days.
- Advertise the resolution of liquidation in the local Gazette within two weeks.
After the process is taken care of, the liquidator will take charge of the company and move towards converting assets to cash to pay off creditors to the highest possible extent.
Compulsory Liquidation is the worst-case scenario when it comes to the liquidation of a company. If the company cannot pay off its debts, the creditors can impose compulsory liquidation. For this to happen, the debt needs to exceed an amount of £750.
Suppose the company is forced into compulsory liquidation. In that case, the creditors will appoint a professional liquidator who will take charge of the company and ensure that the maximum amount of debts is recovered. As soon as the liquidation is imposed, the directors have to relieve control over the operations and turn in the books of accounts to achieve transparency and better understand the company’s financial situation.
Closing Down Your Limited Company After IR35
Since April 2020, IR35 reforms have been implemented that help the government in dealing with “disguised employees” that exploit the existence of their own companies for tax avoidance. Although the new changes implemented were how IR35 determination works, and not the eligibility criteria. So if you were not eligible for it before, it would stay that way. The only implication that you need to consider is that would you be considered a “standard employee” while working for your own company, depending on your job description. And if you do qualify as one, you should be paying National Insurance contributions and income tax. Principal identifiers of understanding your eligibility status are,
- Risk undertaking.
- Basis of Payment.
- Service Exclusivity.
- Intentions of the parties.
Frequently Asked Questions
We have compiled a list of some of the most frequently asked questions to help our clients find answers to their queries.
If your limited company has accumulated many debts, you need to pay them off before you can move to close down your business. In case of insolvency, i.e. your liabilities exceed your assets, you would need to liquidate your company to ensure that the creditors are reimbursed the highest amount of debts possible.
In the case of the company being insolvent, the cost of closing can go upwards to £5,000 plus vat, whereas, in the case of a solvent company, the process is a lot cheaper and will cost from £1,500 upwards as the entire process is much simpler to deal with.
A company that has never traded before can directly apply to be struck off from the companies registered at Companies House. All you need to do is make sure that the company has not changed its name in the last three months and has never traded before. Just submit a DS01 form application, and your company will be struck off within two months.
Although you cannot avoid paying tax on the closure of your company as it would be illegal, there are ways through which you can minimise your tax liabilities. Depending on held assets, there are methods to minimise tax, such as opting for an MVL if your assets exceed £25,000.
If you would like to employ professional help during the closing of your limited company, call up Clear House Accountants at your earliest convenience. With top of the line financial advisors, we promise to help you find the most tax-effective and seamless solution to your liquidation problems.
Jibran Qureshi FCCA is the Managing Director of Clear House Accountants and has over 13 years of experience in practice across multiple industries. Jibran’s educational background includes a Master’s in Financial Strategy from Oxford University and an Executive MBA from Hult International Business School. His experience in Financial Strategy, Tax Planning, Operational Consultancy and Performance Reporting guide his cognizant approach to leading Clear House and its clients to the future. This dexterity led him to be Enterprise Nation’s Top 50 Advisors. Jibran recognised the need to manage the innovative disruptions sustainably early on and shaped Clear House Accountants not just to be compliance specialists but advisors who help build complex ecosystems around cloud accounting software, provide advice on funding support, help manage innovative tax schemes, set up and implement complex strategic plans, and much more. So, his clients can thrive, not just survive.
You Might Also Want To Read