Top 10 tips to closing a limited company
If you’re determining an exit route for your limited company, don’t just roll the dice and play blind by taking a shot in the dark at whatever winding-up solution is put in front of you on the table.
Often, the route with the cheapest initial cost results in the contractor compromising on long-term cost efficiency, because an alternative route could have provided greater tax savings.
Here, exclusively for ContractorUK, Keith Tully of Real Business Rescue reveals his 10 top tips to closing your limited company (or 11 if you count the one above!), in a way which should maximise your profits and help you take a guided, measured, pain-free approach to closing shop.
1. Calculate your exit
The route you take to close your limited company will ultimately be determined by the financial health of your business and whether you owe money to creditors.
In some cases, businesses can be rescued by turning to an HMRC Time to Pay Arrangement to restructure tax liabilities or entering negotiations with creditors. If liquidation is the only available avenue, turn to a procedure that allows for a tax-efficient and cost-efficient exit.
2. Remember, personal guarantees cannot be erased
When closing your limited company, either voluntarily or involuntarily, the conditions around liabilities that are personally guaranteed will not change. If you took out a loan tied to a personal guarantee agreement, you will be held personally liable for this business debt.
3. Finalise your tax position with HMRC
If you are looking to strike off your limited company and haven’t finalised your tax position, HMRC may object to the striking off process. Follow housekeeping guidelines set out by HMRC to successfully close your limited company without any disruption.
4. Ensure company directors are in mutual agreement, or remedy the dispute
Disputes between company directors are common and can be made worse in the event of financial difficulty. For selected liquidation procedures to commence, you must reach an agreement between all parties. There are steps that can be pursued to remedy the disagreement, from buying out shares or allowing the court to decide in the event of a deadlock.
Now for a few tips concerning voluntary strike off, which resumed by Companies House earlier this month.
5. Settle your affairs and tie up loose ends
During the strike off process, creditors will be invited to submit their claims. However, if claims are submitted after the company is struck off, the business could be resurrected. As the company director, you are accountable to creditors and your legal duties bind you to act in the best interests of creditors.
If you apply to strike off your limited company to break free from liabilities, your application is likely to be blocked. In the rare event that this is successful, creditors may apply to reinstate and restore your company to the Companies House register.
This is a dangerous position to land in, as following a formal investigation by the Insolvency Service, you could be disqualified as a director for up to 15 years, face a prison sentence, penalty, or even be held personally liable for the debts of the business.
6. Don’t name change – it could push the process off track
If you’re interested in the detail, section 1004 and section 1005 of the Companies Act 2006 lay out the circumstances under which you cannot apply to strike off your limited company. If you breach those provisions, you could be liable for a fine.
7. Beware Bona Vacantia
When dissolving your limited company, any unclaimed assets, undistributed funds, and credit balances will be transferred to the crown, also known as ‘Bona Vacantia’. If you wish to lay claim to the above after the business is struck off, you will need to restore the business to the register.
Now for a tip concerning insolvent liquidation.
8. Know that director redundancy is a legitimate claim
Entitlement for director redundancy is often branded as a myth. If your business enters insolvent liquidation or administration and has been trading for two years, you could claim director redundancy pay, including additional statutory payments, such as notice pay, holiday pay and unpaid wages. The payment is made by the Redundancy Payments Service (RPS) from the National Insurance pot and the average claim for director redundancy is £9,000.
You can begin your application for director redundancy pre-liquidation or post-liquidation. However, you must submit your claim no longer than 12 months after entering company liquidation. The longer you delay submitting your application will impact the ease of the process and possibly your chances of maximising your claim.
Now for a couple of tips concerning solvent liquidation.
9. Prioritise cost-efficiency over a flitting exit
When closing a solvent limited company with retained profits over £25,000, it may be wise to explore a Members’ Voluntary Liquidation (MVL), rather than dissolving the business to maximise returns. A Members’ Voluntary Liquidation can present an extremely tax-efficient company closure route, as distributions are treated as capital, rather than income.
In layman terms, the funds will be subject to Capital Gains Tax which is at a lower rate than if the funds were subject to Income Tax. Totalling up disbursement costs for the likes of issuing notices and appointing a licensed insolvency practitioner, your company must have a considerable sum of retained profits for it to be cost-effective.
10. Bear in mind Business Asset Disposal Relief (formerly Entrepreneurs’ Relief)
Entrepreneurs’ Relief (which is typically partnered with a Members’ Voluntary Liquidation), is relevant if you’re on the solvent company closure route, and it was recently rebranded ‘Business Asset Disposal Relief.’
Although different in name, the relief can still be used to minimise tax liabilities during the company closure process, if you’re eligible. For example, if you’re a high earning contractor, keep in mind that the lifetime allowance for Business Asset Disposal Relief was recently massively reduced from £10 million to £1 million -- for disposals after March 11th 2020.
You may be closing shop if your business has naturally reached the end of its lifetime, or you may wish to operate through an alternative operating structure in light of private sector IR35 reform, due to be introduced from Tuesday April 6th 2021. If you’re unsure about which route is suitable for you, a licensed insolvency practitioner will be able to advise you accordingly.