Can You Close A Limited Company Without Paying Tax? If the company is solvent there will usually be some tax to pay. If the company is insolvent then it is unlikely there will be tax to pay.
However, it always depends on the facts of the case. This article looks at the closing of solvent companies and some of the tax implications.
Closing a company and limiting the tax consequences is a significant decision for many business owners, so can you close a limited company without paying tax? Reasons why a business owner might desire to close a company could be down to their impending retirement, changing business focus, or financial difficulties. As ever the tax implications will be of interest to such a person.
The reality is if a company has been active tax consequences naturally flow from its trading. If there has been no recent trading but there are assets still within the business then tax consequences may arise from the disposal of those assets or their distribution to shareholders.
Tax Implications Of Making A Company Dormant To Close It Down
Making a company dormant will conclude its own tax position and leave it as an entity that exists in a vacuum as inactive. This will mean that upon becoming dormant there will be no corporation tax implications. The company just need to inform HMRC that it is dormant.
The dormancy of a company means that it does not trade or do anything and as a result, there are no accounting transactions.
Until or unless the company achieve dormant status it will still have to consider the tax implications of its trading activities and asset transactions entered into up to that point.
How To Let HMRC Know A Company Is Now Dormant
To let HMRC know a company is now dormant can be done by phone or post. You will need the company’s unique tax reference (UTR) and HMRC can be contacted at its organisations contact page.
What Are The Tax Implications Of Closing Down A Company?
The starting point is to consider who is paying tax. When a company is closed down there is the company and its tax responsibilities and there can be tax consequences for the owners of the business due to the effect of closure on their shareholdings.
If the company is insolvent then closing the company will be passed to the liquidator who will deal with HMRC claims as a creditor. That is not the same thing as closing it without paying taxes. The position of shareholders can be affected by the potential loss they might incur on the value of their shareholding.
If the company is solvent then at the point when a decision is taken to close it down there is likely to be tax to pay or tax consequences to consider.
Methods Of Closing A Limited Company
- Voluntary Strike-Off is a mechanism which enables directors to apply to have the company removed from Companies House.
- Members Voluntary Liquidation (“MVL”) is commonly used as a tax-efficient alternative to voluntary strike-off to close a solvent company.
- Creditors Voluntary Liquidation (“CVL”) is the leading procedure to close a company that is insolvent and unable to pay its debts when they fall due.
- Compulsory Liquidation is a process that can be deployed instead of CVL but it is a court process as opposed to a voluntary one and can take longer to place the company into liquidation
For more information on closing a company see our detailed guide How To Close A Limited Company.
There are different tax implications depending upon the procedure utilised.
Closing A Limited Company By Voluntary Strike-Off
Voluntary strike-off is a process where the directors of a company apply to have it removed from Companies House. This method is generally unsuitable for companies that are still trading and or have debts and results in the company’s dissolution.
There are restrictions to take into account before this procedure can be used:
- The company must not have traded in the last three months or changed its name.
- Not intended to be subject to formal insolvency proceedings such as liquidation.
Stopping The Company’s Trading Activities
If the company qualifies for voluntary strike-off then it needs to take steps to enable the finalisation of its affairs so that loose ends are tied up including:
- Making staff redundant
- Closing down the company PAYE scheme
- Submission of a final VAT return if it is registered for VAT
- Distribute the assets to shareholders and close the bank account
- File cessation or final accounts with HMRC along with the final CT600 corporation tax return.
For more information on ceasing trading activities please see our guide How To Stop Trading A Limited Company.
Formalities On How To Voluntary Strike Off A Company
In order to voluntarily strike off a company at Companies House which is a major step for a company to take which effectively ends its life the directors must formally pass a board resolution to authorise the procedure.
The next step is using DS01 form to strike off a company a copy of which must be issued within 7 days to all interested parties and stakeholders who could be affected. Whilst the following is by no means exhaustive, it should be sent to all employees, creditors, shareholders, HMRC and directors.
Retention of company records is required along with a copy of the employers’ liability insurance policy.
Tax Implications Of Voluntary Strike Off To Close A Company
If a company has assets of £25,000 or less then a distribution of them to the shareholders is treated under capital gains tax, not income tax. However, dissolution of the company must be within 2 years of the distribution for the capital gains benefit to apply. This is set out in Section 1030A of the Corporation Tax Act 2010 and Section 1030B of the Corporation Tax Act 2010.
For a distribution of company assets prior to closing a company in excess of £25,000 then in order to obtain the potentially available tax advantage under capital gains tax as opposed to income tax the company would need to go instead into Members Voluntary Liquidation.
Closing A Company By Members Voluntary Liquidation
A Members Voluntary Liquidation is a formal insolvency procedure set out in the Insolvency Act 1986.
In order for a company to go into liquidation a liquidator (who is an Insolvency Practitioner) needs to be appointed to winding up the company formally.
For assets in excess of £25,000, this is generally a more tax advantageous route to the shareholders extracting their remaining capital (the assets) in a limited company. Additional potential tax efficiencies can be obtained using this procedure if a shareholder qualifies for Business Asset Disposal Relief. This can result in capital gains tax being paid at 10% instead of 20% up to a distribution of £1,000,000.
In order for a company to go into Members Voluntary Liquidation (“MVL”) the following must apply:
- It must be solvent and able to pay its debts within 12 months.
- Make a statutory declaration of solvency which in effect will confirm the solvency position and detail the assets and creditor position.
Formalities On Placing A Company Into Members Voluntary Liquidation
As with any company closure procedure, it is formal.
The starting point is that the statutory declaration of solvency should be signed by the majority of directors confirming that the company is able to discharge its liabilities within 12 months.
Within five weeks of this, a meeting of the company news to pass a special company resolution for voluntary liquidation at which point the liquidator will also be appointed.
The liquidator is then in control of the company and its winding up.
Tax Implications Of Closing A Company Through MVL
Although the potential benefits arising from Business Asset Disposal Relief (“BADR”) can be considerable in terms of tax savings it was formally a relief known as Entrepreneurs’ Relief. It was often considered a mechanism to reward owner managed directors who had run companies that were then retiring.
However, it has been the subject of some potential abuse with directors closing companies down and starting up the same type of business all over again in a new company.
As a result, the targeted anti-avoidance rules have been introduced to put a stop this tax avoidance in Section 396B of the Income Tax (Trading and Other Income) Act 2005.
The main focus of the conditions to stamp out such tax avoidance are as follows:
- The individual claiming BADR must have at least 5% of the shares in the company.
- It is a close company (generally a company that is owned and controlled by five or fewer individuals).
- The individual receiving the distribution continues to carry on, or be involved with, the same trade or trade similar to that of the wound up company at any time within two years from the date of the distribution.
- The main purpose or one of the main purposes of the winding up is the avoidance or reduction of a charge to income tax.
