Closing down a company: step by step

Where a company can meet its financial obligations, the process of closure, though complex, is reasonably straightforward.Once you have chosen the date on which you wish your company to cease trading, you should not process any more transactions other than those required by the closure process. Then ensure that all creditors have been paid in full. If the company cannot pay them, they need to be notified.

You will need to notify HMRC of your intention to cease trading as early as you can, though it is worth holding off submitting your final accounts for a few weeks or months to ensure that any late-occurring expenses can be included. If you are VAT registered, you will need to cancel your registration. You will also need to run a final payroll to obtain P45s for yourself and any staff you employ, as well as submitting a P35 Employer Annual Return and paying any outstanding PAYE and/or NICs. More details on all these requirements can be found on the HMRC website.

Once you are sure that there will be no more funds coming into or leaving the business, you should prepare and submit your final accounts. HMRC will calculate the Corporation Tax due, which must be paid within nine months (though in practice it is advisable to settle this as quickly as possible, as the company cannot be closed until all tax due is paid). Once this is done, any money remaining may be taken as a dividend (or extracted as capital gain -- see below).

Do NOT leave any funds in the company’s bank account(s); once the company has been dissolved (see below), any such can revert to the Crown. Three months after your company ceases trading, assuming that all outstanding taxes and other commitments have been paid, you may apply to Companies House to have your company dissolved using form DS01 – note that there is a charge of £10 for this.

Following a consultation period (during which Companies House will publicise the proposal to strike off of your company to ensure that any interested parties have an opportunity to challenge the process) and assuming that

1. no difficulties or objections arise from remaining creditors and
2. you don’t change your mind, 

your company will be struck off the Companies House register and will no longer exist.

Where there are accumulated profits in the company, a greater need for the security of such ring-fencing may be felt, together with a natural desire to extract those accumulated profits; there is also the disincentive of the potential tax consequences of extraction. Extraction of retained profits into a safer environment may be wise, whether or not accompanied by a close down.

As we see it, there are generally the following options:

Option 1: extract as dividend

• Tax bill for 25% of the extracted surplus (may equally be expressed as 32.5% of the grossed up dividend), assuming shareholder(s) already in higher rate tax bracket – more if in the 50% bracket
• This approach may be taken to extract the profits, whether or not the company is closed down.

Option 2: capital gain distribution (closedown only) 

• Take advantage of what is now s1030A (which can allow total distributions of no more than £25k on dissolution to be treated as a capital gain)
• There are still some potential anti-avoidance pitfalls which need to be steered clear of, and these are now less obvious than they were under ESC C16
• Annual CGT exemptions and CGT loss relief are available, to the extent that they are unused elsewhere
• Enterpreneur’s Relief may be available (see notes below) - Where shares have been held for more than 1 complete year, and other applicable conditions are satisfied, the applicable tax rate may be 10% and not the basic CGT rate of 18%
• There is some advantage to planning ahead (eg it may be possible to spread the capital distribution over 2 tax years, and so claim 2 years’ annual CGT exemption)

Option 3: Members Volontary Liquidation (closedown only) 

• Put the company into formal Members Voluntary Liquidation (see our other article, Closing a solvent Business)
• This requires the engagement of a liquidator, at a cost. It takes a little time.
• There are still some potential anti-avoidance pitfalls which need to be steered clear of
• Enterpreneur’s Relief may be available (see notes below) - Where shares have been held for more than 1 complete year, and other applicable conditions are satisfied, the applicable tax rate may be 10% and not the basic CGT rate of 18%
• There is some advantage to planning ahead (eg it may be possible to spread the capital distribution over 2 tax years, and so claim 2 years’ annual CGT exemption).
• Where there is more than one shareholder, the consequences for each need to be considered separately, before a reasoned decision can be taken as to the best overall approach.
• There may be other options - much depends on details which change from situation to situation, and on the wishes and intentions of the individual(s) concerned. For example, overseas connections / future intentions can open up other avenues.

In general terms, where the company is to be closed down, it is wise to evaluate all the options, and consider anti-avoidance provisions. Where the company is insolvent, creditors in general and HMRC in particular, will certainly object to the company being struck off... if they notice. In that case, you have to reply to any correspondence that the company has no money, no assets and cannot pay. Unless creditors have personal guarantees on the directors, and unless directors have been taking illegal dividends, there is little they can do however to recover their funds. That's one of the designs of the limited company after all.