Closing a limited company: the difference between voluntary and forced closure.

“Closing the company” covers four different legal routes. Two are voluntary, in that the directors and shareholders decide to take them. Two are forced, in that somebody else starts them. The tax on the company is broadly the same in all four. What changes is who is in control, what happens to anything left in the company, and how the shareholders are taxed on what they receive.

There is a fifth route, a creditors’ voluntary liquidation, where the directors of a company that cannot pay its debts choose to put it into liquidation before a creditor does. It is voluntary in name, but from that point the liquidator acts for the creditors, not for the directors.

A company that has simply stopped trading does not have to be closed at all. It can be left dormant for as long as you like, provided its annual accounts and confirmation statement are still filed every year.

Striking the company off the register is usually the cheapest way to close one that can pay its bills. A company can apply only if, in the last three months, it has not traded or sold any stock and has not changed its name, and if it is not threatened with liquidation and has no arrangement with its creditors.

Before the application

1. Tell HMRC, and prepare final accounts and a company tax return up to the date the company stopped trading. Say on them that they are the final trading accounts and that the company will soon be struck off.
2. Pay the corporation tax and anything else owed: VAT, PAYE, suppliers, loans.
3. If there are staff, follow the redundancy rules, pay final wages, and tell HMRC the company has stopped employing people.
4. Deregister for VAT, collect what the company is owed, and sell or transfer its assets.
5. Share out what is left among the shareholders, then close the bank account.

The application

The form is DS01, signed by a majority of the directors. It costs £13 online, or £18 on paper, where the cheque must not be drawn on the company’s own account. Within seven days a copy has to go to everyone affected: shareholders, creditors, employees, the trustees of any pension fund, and any director who did not sign. Not telling them is an offence.

Companies House publishes a notice in the Gazette. If nobody objects, the company is struck off not less than two months later, and a second notice confirms that it no longer exists. Final accounts do not have to be filed at Companies House, only with HMRC.

Empty the company first. On the day it is dissolved the bank account is frozen, and anything still in the company, including a tax refund that arrives later, belongs to the Crown. Getting it back means restoring the company.

A company’s accounting period for corporation tax ends on the day it stops trading, so the last period is usually a short one. The return for it is prepared in the normal way, with four differences.

• No annual investment allowance. Capital allowances are not claimed on equipment in the final period. Instead the tax value of the company’s equipment is compared with what it was sold for, or what it was worth when it was taken out. If it fetched more, the difference is added to profit as a balancing charge; if less, it is deducted as a balancing allowance.
• Assets are treated as sold. Selling the company’s assets, or handing them to shareholders, can produce a chargeable gain for the company, worked out on their market value.
• The thresholds shrink. Profits up to £50,000 are taxed at 19% and profits over £250,000 at 25%, with marginal relief in between, but both lines are reduced in proportion for a period shorter than 12 months.
• A final loss travels further back. A trading loss made in the last 12 months can be carried back against the profits of the three years before it, most recent first. This is terminal loss relief, and it can produce a repayment of tax paid in earlier, better years.

The tax is due nine months and one day after the period ends, and the return within twelve months. Both need to be dealt with before the company is dissolved, because a company that no longer exists cannot claim a refund.

Money paid out to shareholders as the company closes is taxed in one of two ways, and the difference is large.

• On a strike off, up to £25,000 in total is treated as a capital gain, provided the company has collected what it was owed and paid what it owed.
• On a strike off, more than £25,000 is treated as a dividend: all of it, not only the part above the line.
• In a members’ voluntary liquidation the payment is a capital gain whatever the amount, but a licensed insolvency practitioner has to be appointed and paid.

Capital gains are taxed at 18% within the basic rate band and 24% above it, after a £3,000 annual allowance. Business Asset Disposal Relief, where it applies, charges 18% on the whole gain. Dividends are taxed at 10.75%, 35.75% or 39.35% depending on your income, after a £500 allowance.

Closing and starting again. If you take a capital payment from a liquidation and carry on the same kind of business within two years, HMRC can tax that payment as a dividend instead. Closing a company to take out its profits cheaply, then reopening, is what the rule is aimed at.

The registrar of companies can strike a company off without being asked. It happens when the registrar has reason to believe the company is no longer carrying on business, and the usual reasons are that the accounts or confirmation statement have not arrived, or that the company has no directors.

The registrar writes to the company first. If there is no answer, a notice goes in the Gazette, and not less than two months later the company is struck off and dissolved. Where the registrar believes a company was registered on a false basis the notice period is 28 days.

Why letting it happen is a poor way to close a company

• Everything left passes to the Crown. The bank account is frozen on the day of dissolution, and cash, equipment, property and money owed to the company all become ownerless property.
• The tax does not go away. The company is still due to file its return and pay its corporation tax. HMRC, like any creditor, can object to the strike off to keep the company on the register, or apply to have it restored afterwards.
• The directors are still answerable. Not filing accounts and a confirmation statement is an offence in itself, and restoring the company later means filing everything that was missed and paying the penalties.
• Nothing reaches the shareholders. Money taken out in the months beforehand is still taxed as a distribution, and money left in is lost.

If the notice has already arrived

Answer the registrar’s letter promptly and deliver the missing documents. An objection has to reach Companies House at least two weeks before the date in the Gazette notice. If the company has already gone, a former director or shareholder can apply for it to be restored within six years, provided it was trading when it was struck off, by filing everything that is outstanding and paying the penalties.

A creditor who is owed £750 or more and has not been paid can ask the court to wind the company up. HMRC does this for unpaid tax. If the court makes a winding up order, the official receiver takes charge, and from that moment the directors no longer control the company or anything it owns.

• The bank account is frozen as soon as the petition is filed, not when the order is made.
• The tax year resets. The accounting period ends on the day winding up starts, a new one begins, and from then on the periods run for 12 months at a time until the liquidation is finished. The liquidator files the returns and pays the corporation tax out of the company’s assets, at the usual rates.
• The liquidator reports on the directors. Directors have to hand over the records and answer questions. A director whose conduct is found to be unfit can be banned from acting as one for between 2 and 15 years.
• The name is restricted. For five years the directors cannot run another business under the same or a similar name, with limited exceptions.
• Money you owe the company is an asset. An overdrawn director’s loan account will be asked for. If it is written off instead, it is taxed on you as income.

A company that cannot pay its debts has options before it reaches court, including a company voluntary arrangement and a time to pay arrangement with HMRC. They are only available while the directors are still in control, which is the practical difference between closing a company and having it closed.