Tax Implications on Closing A Limited Company

Introduction for closing a limited company

In order to close a limited company, it is imperative to seek agreement from all the company’s shareholders and directors. The way the limited company closes the organisation depends on whether the company can pay its bills/dues or not. If an organisation can pay its dues i.e. the company is solvent, then there are two ways of closing the company:

Put an application to get the establishment removed from the Register of Companies

A business, in the United Kingdom, can close down a limited company by getting the company removed from the Companies Houses, only if:

• The company has not sold or traded any stock in the past 3 months
• The company has no contracts with creditors, e.g. a Company Voluntary Arrangement (CVA)
• The company shouldn’t be insolvent
• The company has not altered its name in the previous 3 months

When the limited company owner files an application to ‘strike off’ a limited company from Companies Houses, the business has some accountabilities to meet before closing down the business properly. Prior to filing an application to close down the establishment, it must be legally closed down and this includes:

• Informing stakeholders and other interested parties, along with informing the HM Revenue and Customs (HMRC)
• Ensuring that staff is treated as per the rules
• Managing business accounts and business assets

Tax Implications to apply for striking off a limited company

In order to apply for striking off a limited company, the owner must send form DS01 to Companies House. The application should be signed by most of the company’s directors and the owners must manage assets of the company before applying. The cost to strike of a limited company from Companies House is £10. It must be noted that the amount should not be paid using a bank account that belongs to the firm being removed. If income of a company is more than £25,000, all stakeholders will be required to pay income tax at their individual rate. From 6-Apr-16, dividends are taxed at either 7.5% or 32.5% or 38.1%

Tax year	2017/18	2018/19
Dividend tax-free allowance	£5,000	£2000
The lowest rate of tax on dividend (Dividend ordinary rate)	7.5% on earnings above £33,500	7.5% on earnings above £34,500
The middle tier of tax on dividends (Dividend upper rate)	32.5% on earnings over the basic rate till £150,000	32.5% on earnings over the basic rate till £150,000
The top rate of income tax for high earners (Dividend additional rate)	38.1% on earnings over £150,000	38.1% on earnings over £150,000

Before closing down an organisation, an application must be filed to remove the company and a copy of the application must be shared, with individuals who could be affected, within 7 days of filing the application.

These individuals include the following:

1. Any director of the company who didn’t sign the application
2. Creditors of the limited company
3. Employees of the company
4. Trustees or managers of any employee pension fund
5. Stakeholders

If the above mentioned aren’t informed, the company owner might have to pay fine and likely to face trial. If an organisation employs workforce – rules must be followed if the staff is laid off, their final salary or wage must be paid. The company owners must share a company tax return and final statutory accounts with HMRC – it is not imperative to file final financial records with Companies House. To share the information with HMRC, the below mentioned steps must be followed:

1. Organise and finalise company tax return and accounts
2. File company tax return and accounts, declaring that these are the closing trading accounts and the firm will soon be dissolved
3. Pay all outstanding corporation tax liabilities

The company records such as bank statements, invoices etc. must be retained for 7 years, post the closure of business and if the firm had a staff, copies of its employers’ liability insurance policy and schedule must be kept for 40 years, post the date the firm was dissolved. Additionally, with regards to Capital Gains Tax (CGT), the owner might be taxed if he/she take out the assets out of the business before it’s struck off. The owner might be eligible to receive tax respite on this through Entrepreneurs’ Relief and this can be computed while working out his/her personal Self-Assessment tax return. Where profits are in excess of £25,000, all stakeholders are eligible to give Capital Gains Tax (CDT) and when selling shares, the consistent rate of Capital Gains Tax is 10%, or 20% beginning 6-Apr-16. However, applying for Entrepreneurs’ Relief means the owner will pay a tax rate of 10% on the sale, irrespective of the rate of particular tax

Begin a members’ voluntary liquidation

A business owner can opt for members’ voluntary liquidation if the firm can pay its obligations and one of the below mentioned apply:

1. If an individual doesn’t want to operate the business any more
2. If the individual is stepping down from the family trade and no other person is willing to operate the business
3. If an individual wants to retire

To pass a resolution for members’ voluntary liquidation, an individual must:

1. File a ‘Declaration of solvency’ – this is applicable for all English and Welsh companies
2. Request an accountant in Bankruptcy for form 4.25 – this is applicable for Scottish companies

It is imperative to evaluate the organisation’s liabilities and assets before making the declaration. The owner must write a declaration stating that the directors have evaluated the firm and are certain of the firm’s capabilities to pay its debts. The declaration should also take account of:

1. The address and name of the firm
2. The address and names of the firm’s directors
3. The time-period in which the firm can pay off its debts – this period should be less than 12 months from when the firm is liquidated

The organisation must encompass the statement of the business’s liabilities and assets. Post signing the declaration, there are 5 additional steps to members’ voluntary liquidation such as:

1. Signing the form 4.25 – this form must be signed by most of directors in the presence of a ‘notary public’ or solicitor
2. Set up a general meeting with stakeholders within 5 weeks and pass a declaration for intentional winding up
3. At the meeting, engage an approved insolvency consultant as an administrative receiver who will take control of winding up the business – a limited company can find a liquidation practitioner online
4. Publicise the resolution in The Gazette inside 14 days
5. Post a signed statement or form 4.25 to Companies House inside 15 days of passing the resolution

Illustration

When a corporation is closed, there are fundamentally three sets on extracting funds:

1. Dividend – asses at regular dividend rates
2. Strike off – till £25,000 at Capital gains tax rates, but treated as a dividend if above £25,000 at closure
3. Members Voluntary Liquidation – permits access to Capital gains tax rates if above £25,000 at closure

Funds equals amount in company after payment of Corporation Tax, and settling all other liabilities including repaying directors account
	Dividend (£)	Strike off (£)	MVL (£)
Funds:	25,000	25,000	25,000
CGT annual allowance (NB 16-17 exemption rate -		(11,700)	(11,700)
uplifts per annum)
Tax charge if:
a Basic Rate tax payer	1,875	1,330	1,330
a Higher Rate tax payer	8,125	1,330	1,330
an additional Rate tax payer	9,525	1,330	1,330
Costs	-	-	(2,000

Also See: Limited Company Formation

Speak with an expert

Any questions? Schedule a call with one of our experts.

Book a call