If you are ceasing to trade, then there are various options for your limited company:
- 'On hold'
- Dormancy
- Investment
- Striking off
Further information on each of these options is detailed below:
'On hold'
If the cessation of trade is temporary, the company can be left ticking over for a few months with no significant implications. You should ensure that any VAT, PAYE and corporation tax payments are still paid by their relevant due dates. All regulatory filings should still be completed, including VAT and payroll submissions, if registered, even if the submissions are nil. By law, however, the company does not qualify as "dormant" at this time. The phrase "dormant company" is often abused, but under the Companies Act only applies where the company has no accounting transactions in a complete financial year.
Dormancy
If the period of inactivity is longer, the company may become dormant. To be entitled to file dormant accounts and no corporation tax return, you must complete a full 12-month accounting period with no significant accounting transactions. In practice, this means the bank account must be closed before the financial year for which dormancy starts or as soon as final liabilities have been settled. Any bank interest would negate your entitlement to dormancy.
When a company becomes dormant, our monthly fees for preparing and submitting your annual confirmation statement and dormant company accounts will be reduced. Personal tax and any other services would incur additional fees. One of the advantages of dormancy versus striking off is that the company can easily and quickly resurrect at any time if you find a consulting contract, for example.
Investment
If you have significant reserves, you may wish to consider making investments via the limited company. Investing is a regulated area, and we cannot provide financial advice on how you should invest. However, if you would like financial advice, we can put you in touch with a financial advisor or a a broker for SPV mortgages.
If you have substantial reserves and withdraw this money out of your company, you will crystallise a sizeable personal tax liability. Instead, you can earn a return on the funds and extract the profits later when it is more tax efficient for you personally. It is possible, for example, to invest in property by forming a Special Purpose Vehicle (a limited company for a property) and make an intercompany loan from your original company for the deposit with no tax consequence (besides the stamp duty).
You do not need to do anything specific to become an investment company; instead, it automatically happens if the company has more than 20% in investments. The 20% can be calculated as HMRC deems - it can be turnover, your management time, or assets of the business. For further information, please see HMRC's definition of an investment company.
Please note that if the company becomes an investment company, Business Asset Disposal Relief will be denied (see below).
Striking off
If you do not intend to use the company in future, there are two realistic options to close it: a "winding up" or "dissolution" of the company under the Companies Act s1000 or a Member's Voluntary Liquidation under the Insolvency Act 1986. However, we recommend speaking with your Account Manager, particularly if you are considering Inheritance Tax implications.
A word of caution: if you are a contractor concerned with demonstrating you are outside of IR35, having the company struck off at the first opportunity when you return to permanent work or have a short spell out of contract may not help demonstrate that you are a genuine business. If you anticipate that you may return to contracting within 1 to 2 years, then it would pay to keep the company alive. Having the company struck off does not eliminate IR35 risks – these are personal rather than corporate.
Warning! Once a company is struck off, all remaining assets pass to the Crown. Any outstanding repayments, such as corporation tax refunds not yet processed by HMRC, will not be repaid to you.
Winding up or dissolution
This involves distributing surplus company funds until the amount available to distribute in the winding up is £25k or less. The final distribution of this £25k is then treated as a capital sum under S1030A Corporation Tax Act 2010.
This is useful where the funds available for distribution at the time of close down are lower as it is simple, avoids the cost of a liquidator, and all the treatments are laid down in Statute. Practically, the final distribution will be subject to Capital Gains Tax rather than Income Tax, with the Annual Exemption being available and the balance being charged to Capital Gains Tax. The Annual Exemption for capital gains is £3,000 for 2024/25.
Business Asset Disposal Relief
Business Asset Disposal Relief regime (BADR) was previously called Entrepreneurs Relief. This gives access to a 10% tax rate for up to £1Million of gains (a lifetime limit). There are several requirements which include:
1. The company must be a trading company (or a holding company of a trading group)
2. The company was wound up within 3 years of ceasing to trade
3. The recipient shareholder must have held at least 5% of the company's voting ordinary share capital in their own right
4. The recipient shareholder must have held the shares for at least two years
5. The recipient shareholder was an employee or director of the company
Shareholders who meet the requirements will qualify for a 10% tax on capital distributions. Distributions not qualifying will be subject to the usual capital gains rates; 10% for basic rate taxpayers and 20% for higher rate taxpayers. If your other income is below the higher rate band, the remaining proportion will be taxable at the lower capital gains rate and the rest at the higher rate.
Phoenix Rules & Target Anti-Avoidance Rule
HMRC have now taken steps against individuals that look to exploit extracting profits via a capital distribution, by opening and closing businesses every couple of years, also known as 'Phoenixing'. Under ITTOIA 2005, s 396B BADR will be denied if a new company is formed within two years or if the recipient is involved with the same trade in some other capacity including operating as a sole trader, partnership or via another company that you or someone you are connected to (i.e a spouse) that holds 5% or more interest in. Working for a company as an employee with less than 5% equity/interest is still permitted.
For the Phoenix rules to be satisfied it must be clear that the only reason for the arrangement is for the avoidance or reduction in income tax. This should not affect those using this as part of a genuine retirement plan, but then, say, end up with a small amount of contracting work. If, in future, you decide you want to restart within two years, we would need to refile your personal tax return for and pay the extra tax due plus interest.
If you have wound up your company and been working PAYE for a company unconnected to you, you will need to wait two years from the date of your last capital distribution.
A mixture of normal dividends, capital distribution
If you are a basic rate taxpayer, it may be tax efficient to take out some of the remaining reserves via dividends over capital gains since the basic rate of dividends is taxed at 0% for the first £500 and 8.75% for the basic rate, which is less than the 10% levied on capital gains. Your account manager will be able to advise on a tax-efficient exit based on your expected income for the rest of the tax year.
Member's Voluntary Liquidation
This is a more expensive route but allows for Capital Gains treatment of all funds in the company, which should qualify in most cases for treatment under the BADR regime. A members' voluntary liquidation (MVL) requires a licensed insolvency practitioner to act as a liquidator who will realise the assets, pay off all liabilities, and return the surplus to the shareholders. We can put you in touch with a licensed insolvency practitioner if you take this route.
If you are considering closing your company, please speak to your account manager in good time so that the most appropriate method can be used. It is essential to establish whether the tax advantages will cover the costs associated with the liquidation or whether a better option exists. Other options available include leaving the company open and drawing the remaining cash as tax-efficient dividend amounts in subsequent years.
I've lent money to my Company and it will be unable to repay me
If your company incurs trading losses, those losses will remain with the company and cannot be recovered by you personally. Once the company is closed, any losses will be written off. However, if you've lent money to the company for business purposes, you may be eligible to claim capital loss relief on your personal tax return. To qualify, there must be no reasonable chance of recovering the loan and the company should have been actively trading or planning to trade when the loan was made.
HMRC state that to qualify for relief the loan must be to a borrower who:
- uses the money wholly for the purposes of a trade
- uses the money to set up a trade, as long as they start trading
A trade includes a profession or vocation, but does not include money
lending. If the loan is made to a company, that company can pass the
money to another company in the same group to be used in that other
company’s trade.
Loans may include credit balances on a director’s loan account but
not ordinary trade debts. Exceptionally, trade debts may qualify for
relief if there’s a specific agreement to extend the period of credit
beyond what’s customary for the trade concerned. But you cannot claim an
allowable loss if you have claimed the bad debt as a trading expense.
HMRC allows a loss to be claimed within two years of the loan becoming irrecoverable as long as specific conditions are met. Since a dissolved company would definitively render the loan irrecoverable, you may be able to claim this capital loss up to two years before the dissolution, provided you can show the loan was already irrecoverable at that earlier time. Keep in mind that capital losses cannot be used to offset income on your personal tax return.