In the UK it is remarkably easy and cheap to form a limited company. For less than £100, perhaps even less than £50, you can have a company formed in a matter of hours. This compares to the situation in many other EC countries where the costs can run into thousands and it can take weeks, if not months, to get a company registered.
However, if your business has come to the end of its life, either because you can’t rescue it or because you no longer want to keep it going, you will find that closing down a UK company can be far from simple.
Liquidation
The normal way to close down a company is by starting a process called “liquidation” or “winding up”. This is a legal process in which a liquidator is appointed to wind up the affairs of a company and at the end of the process the company ceases to exist. This process does not mean that all the creditors (those to whom the company owes money) will get paid.
There are basically three different types of liquidation:
- Members’ Voluntary Liquidation: this is when the members (shareholders) of a company decide to put it into liquidation and there are enough assets to pay all the debts of the company. The members appoint and pay a liquidator themselves (or out of the assets of the company).
- Creditors’ Voluntary Liquidation: this is when the shareholders decide to put the company into liquidation but there are not enough assets to pay all the debts of the company. The creditors appoint and pay a liquidator themselves (or out of the assets of the company if it has any).
- Compulsory Liquidation: this is when a court makes a “winding-up” order for the company to be wound up, usually on the petition of someone who is owed money by the company, although the directors may also apply for a winding up order, usually because neither they nor the shareholders are able or willing to pay the fees – which can be high – for a voluntary liquidation. The court appoints and pays for a liquidator but can recover all or some of that from the sale of any assets.
If your company is unable to pay its debts it is said to be insolvent and should cease trading or the directors may become liable for the debts. If you suspect that the company is insolvent you must take professional advice and may need to liquidate the company, although it may be possible for licensed insolvency practitioner or other business rescue advisor to negotiate arrangements with those to whom money is owed to keep the business trading. Note that being unable to repay shareholders does not make a company insolvent. They knew when they invested they could lose their money and are at the very bottom of the list of creditors who would only get paid after everyone else had been paid 100%.
So, take appropriate advice. However, there is an alternative to liquidation which I want to discuss next.
Dissolution
This is a simpler and cheaper method and is ideal for closing down companies which have no debts. However it can sometimes be used to close down companies which are insolvent – though this cannot be guaranteed.
In a typical case of a solvent company the steps would be as follows:
- The company should cease trading and carry out no further transactions, except those which are necessary to wind it up.
- Anyone that the company owes money to should be paid; otherwise they may object to the company being dissolved in this way. The company bank account should not be emptied or closed until all company debts have been paid. Any loans to or from any company directors or shareholders should be repaid.
- If any vehicles or equipment have been bought on any form of hire purchase, leasing or finance agreement, then the finance company should be contacted to establish the options for ending the agreement early.
- The company must apply to HM Revenue & Customs to (HMRC) have its VAT registration cancelled, using form “VAT 7” A final VAT return will need to be completed, and there may be a VAT payment due.
- If the company employs staff they should be issued notice and a final payroll run for them (bearing in mind that they may have redundancy payments due to them) and P45s issued. At some point the company will need to make a final P35 return of payroll information to HMRC.
- Any of the directors and the company secretary may wish to resign, though at least one director should remain in place to deal with the closure. Remaining as an unpaid director of the company should not affect their own personal taxes in any way.
- A final set of accounts will need to be prepared, and submitted to HMRC. However this is unlikely to be possible immediately after the company stops trading as there will be further expenses so a letter should be sent to the tax office informing them that the company has stopped trading, has no further taxable income, and will apply for dissolution in due course. Mention that final accounts will be forwarded in due course. If you do not do this then HMRC may object to the company being closed down.
- Any corporation tax should be paid from the company bank account. The company generally has 9 months from the close of business to pay this tax, but the company cannot be closed down until it is paid.
- Any money or equipment left in the company after all these expenses have been met should be paid out to the shareholders in proportion to their shareholdings. It may be worthwhile for the company to apply to HMRC to have such payments treated under Extra Statutory Concession C16. This treats all such final payments as capital gains instead of dividends and may result in less tax being due.
Once 3 months have passed since the business ceased trading the directors (or a majority of them) can make an application to Companies House to have the company struck off. You can get full details of how to do this from the Companies House website. There is a £10 fee and you can download all the forms free of charge.
If the company is insolvent then it still may be possible to use this process, however to do so you will need to get approval from all those to whom the company owes money by writing to them with a notice of intention to have the company dissolved. You have to confirm you have done this before Companies House will process the dissolution and if it later is proven that you didn’t write to everyone you could be guilty of perjury.
You probably will need advice on what to say in the letter but in general you need to explain that the company is insolvent, cannot pay its bills, and cannot continue to trade. Tell them that the directors want to dissolve the company but that if creditors object the company will have to go into liquidation and as there are no funds to pay for a voluntary liquidation one of them will have to petition the courts at their own cost.
Be aware however that even if trade creditors don’t object it is possible that HMRC will object if substantial sums of tax (Corporation, PAYE/NI or VAT) are due unless they can agree a repayment schedule with the shareholders or directors taking on personal liability. In this case, get professional advice before signing anything.
Ben, you cannot ignore the bank in the process but what you need to do is get their agreement that they will not object to the dissolution on the basis that you agree to honour the guarantee on agreed terms. Strictly speaking if the company has some cash available you should split it up between all creditors – including the bank – but if you left the bank out of the equation (with their agreement) then other creditors would be unable to complain as you are paying them more that way.
Hi. One of my companies has run out of cash. I have ceased trading about 2 months ago with this company. However i took a loan with the bank about 2 years ago which still has a balance. This loan had a directors guarantee attached to it in my name. Can i still go through the dissolution process, will i now need to go through the process but ignore the bank loan in the company dissolution or do i need to include them in the process as well. The bank have written to me personally an i need to put an agreement in place to pay them back the money over a set period of time.
I am also a director of another company, that has been trading for 12 years and does ok.
Any help would be gratefully received. Thanks
Hi Nyshah. You say your partner was a director but then go on to talk about “we”. Were you also a director or company secretary? Were either or both of you shareholders in the company? You can check the Companies House website http://www.companieshouse.gov.uk to see if the form TM01 or TM02 has been filed. If not contact Companies House and ask them to advise you how best to file a form yourself. Note that even resigning as a director may not remove any liabilities for bad decisions or wrongfull trading and neither will it get a director release from any Directors’ Guarantees.
hi my partner was a director of a limited company we left after 2 months and asked to be free from the company is there a way i can check our names have been taken off this company as they are in a lot of debt and dont want this coming back to us. also how do i go about closing the limited company if its still in our names?
If you put money into a limited company and that company used it as a deposit to buy a property then I presume that there is a mortgage also. The property is indeed an asset of the company and the company would have to dispose of it (perhaps transfer it to you) before it would be allowed to dissolve. If your company was struck off by the Registrar of Companies – typically for failing to send in accounts or annual returns – then indeed the assets of the company pass to the Crown. They can be reclaimed by restoring the company but indeed the assets go to the Crown.
I have got a small limited company. It did not bring any profits at all for more than 2 years. I deposited some money into it from my dividends coming from another limited company. That money was used as a deposit to buy a property overseas. The question, would that property ttreated as an asset? I heard if you dissolve your company you lose your assests to the Crown. What could I do?
Hi Bill, without knowing about your personal circumstances I can’t comment on Entrepreneurs’ Relief excapt to say you would appear to be able to take advantage of it so long as you distribute the cash balance correctly. Your accountant can advise you of the best way and you just tell HMRC about it in due course. Once you have distributed the cash then simply applying for dissolution should be sufficient. If you or your accountant have any doubts then contact your tax office and see what they say.
I would like to retire and close down my limited company. It has no debtors, a significant cash balance (over £40000) and no other assets. Will it be better to dissolve it or to liquidate it and how can I benefit from Entrepreneurs’ Relief?
Hi Iain, and thanks for taking time to comment. Frankly I’m not quite sure why you have chosen to comment on this particular post as there are others which might be more appropriate. You are right – in any DIY situation you must proceed with caution. You should see my attempts at putting up shelves! However that doesn’t mean that business owners can’t take on more responsibility for accounting and taxation – or anything else – so long as they get appropriate guidance. To my mind there are far too many “professionals” who take advantage of clients and end up exploiting their access. I’m thinking here of so called consultants who are more concerned with piling up the chargeable hours “advising” clients rather than teaching the clients how to be more self sufficent. A number of years ago I came across a situation where an accountant who was invited to dinner in the clients’ home put his time and taxi fares on his next bill. That said, many of the people reading this post are in such a mess that they can’t afford to call in an insolvency practitioner but if they follow the guidance then they may be able to close their companies down with minimal fuss and expense.
Hi Matt – sorry for the delay but I’ve been struggling with some IT issues. Any money the company owes you as a shareholder is irrelevant. Shares are risk capital. If it owes you as a director or employee then yes you can write that off. Alternatively as director send yourself a letter (as a creditor) saying you intend to dissolve the company and ask for confirmation that you won’t object.
Ed, I’ve been having some problems with my server and had to migrate everything to new hardware and as a result some things have not been working correctly – basically the wrong backup was used – so I’m a bit behind answering questions. Also I’m a bit late getting my D-I-Y dissolution kit ready for download but hope to do so this weekend. It isn’t free but at £19.95 I hope you can afford it. It will give you everything you need.
Debbie, so long as you and your brother don’t object then the company can be dissolved. As directors you will need to send yourselves a letter stating you want to dissolve the company and give yourselves the opportunity to object. Silly I know but legally you are separate from the company. As for being a sole trader I can’t see why you should get any more or any less help from the government.
Susan – I agree that your ex-accountant is being rather short sighted. From what you say he seems to still be billing you – what work is that for? If you haven’t traded for three years and you have told him you can’t pay him I would have thought he would have stopped working. If he has any of your company records then by law he must let you have these back but he is under no obligation to provide you with any actual accounts he may have prepared or give you or another accountant his working papers.
Hi Damien – if your company has no other debts apart from the one to the bank then you can take the voluntary dissolution route detailed here but only if the bank don’t object. As explained, you need to write to the bank and tell them you have stopped trading and as you don’t have the money to go through a formal insolvency procedure you want to dissolve the company. Point out if they object then they will need to commence winding up at their own cost. I suspect they will try to get you to take responsibility for the debt if they haven’t already done so. Remember that if you gave a director’s guarantee they can come after you anyway.
Matthew – like Chris you need some individual advice. Have a look at this website and get in contact to see if they can help. The initial interview is free.
Chris – you need some individual advice. Have a look at this website and get in contact to see if they can help. The initial interview is free.
Gareth – I think you are in a pretty complex position here and really need to talk this through and possibly get some professional advice. Have a look at this website
I don’t think I’ve ever posted a reply to a blog before but, being alerted to this article by a client, I feel compelled to comment.
While the info contained herein is informative and well intentioned, I urge extreme caution to a DIY approach in dealing with legal and taxation matters. Just because you CAN submit your own accounts or represent yourself to HMRC does not mean that you should.
1. I have had many clients come to me over the years who have made an honest mistake in their accounts, replicated year on year, which has ended up costing them thousands (and sometimes tens of thousands) of pounds that we, as an accountancy firm, would have spotted easily and corrected.
1. The taxman is only human (honest!). HMRC Inspectors have targets and, rightly or wrongly, if you don’t have an experienced tax adviser batting for you in a tax or VAT enquiry, they will see that taxpayer as the softer target to the one who has.
In short people, get some professional advice. Sure, there are good and bad accountants out there but GOOD and timely business and tax advice will more than pay for itself. And, to put my money where my mouth is, if anyone here wants an entirely FREE hour’s advice, you can find me through our website.
Iain Rankin
Director, TaxKings Limited
I am the director and major shareholder of a ltd company that has existed for many years, but has not traded during this soon to be ended, financial year.
In previous years I was using my personal money to pay for things. This was not paid back to me by the company so I ended up with being owed a substantial amount by the company. There are no other creditors – tax has all been paid and I’ve de-registered for VAT.
Last year’s accounts show a loss. Balance sheet shows assets of a small amount in the bank, a small amount of fixed assets (computers), but a very much larger amount owed to the director (me). Even after using the money in the bank to pay part of the loan and transfering the computers to me for another part, the company is still left owing me a sizable amount.
Problem – How to close down the company.
The company is not trading so is technically insolvant. This appears to prevent my using the voluntary strike off and dissolution approach at Companies House. Anyway I’d prefer to avoid using this approach since it would show me as director of an insolvant company.
However, if I write off the the amount that the company owes me, my understanding is that this will show up in the company accounts as income and thus a profit for the year. Would the company end up paying tax? Also, does that mean I’m still trading and thus inelligible for voluntary strike off?
Do I just wait for Companies House to strike me off?
Hi James
I’ve run a Ltd business for 20 years.. always had good turnover approx £350k pa but the last 3 years due to the recession I’ve seen turn over drop 30%..residential customers slow paying my invoices , some even although I have contracts.. call my bluff and won’t pay final payments and I’ve had commercial customers go bust before I get paid… despite this I’ve carried on but now due to the recession and loss of bussiness I,m struggling with 40K owed to merchants .. nothing to the banks..or tax.. I’ve just got tired of working 7 days a week .. and having to absorb all the costs and being treated like a criminal by HMRC ,, because i may have failed to send in some paparwork with “Nil ” return….taking bad payers to court is a waste of time..as i always win but the debtors plead poverty and the courts accept their offer of £5 per month..
I feel it’s time to stop juggling and to wind things up…. but owing the merchants over £40K worries me..I can’t pay it off if .. I written to them advising them of my financial dificulties
Chris
I have a ltd company which I want to close down. It has not traded for over a year, owes no tax and has been deregistered for vat. I haven’t paid myself any renumeration either.
Unfortunately, on paper (ie in the accounts) it owes money to me as director/shareholder. Can I write off the debt so that I can close the company without being insolvent?
hello
where do i get the advice as to what to put into the letter to creditors if i need to disolve the company. the company or my self have no money for advice it is a ltd company
please help
Hi
I wonder if you can help. I am a director with my brother of a small pet service company which is limited, but we are now struggling, I would like to dissolution, there are no outstanding debts owed to anyone, just the set up fee which, we put into the company ourselves, I understand this will be lost (£18k). Could i do a dissolution on this company?
My next question is if I wanted to set up again as a sole trader, how would this effect me and would I get more help from the government as a sole trader?
thankyou.
Regards
Debbie
Please can anyone help? I have been trying to close a Limited Company for several years but have had problems getting certain information from the accountant. To cut a very long story short, I applied to strike off the company with a DS01, as advised by a liquidation expert. My Company hasn’t traded in at least 3 years. The only creditor is the accountant and he has now put a stop on the company being struck off. This is going to get us nowhere. I have never denied that I owe him money but there is no earthly point in him continuing to bill me for work I can’t currently pay for and so never getting the company closed. Without final accounts I am completely stuck.
Any advice would be more than welcome.