The key to successfully closing your Limited company is to make sure it is done the right way: ensure tax planning minimises the tax bill and leaves you with the maximum gain. There are two ways to close a solvent company, and the best route to take will depend on the amount of money the company has – here is how to decide which one is right for your circumstances.

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However the final funds are to be distributed, by the directors under a statutory concession or by a liquidator under a formal MVL, there are a lot of formalities to winding the Limited company up.

Closing accounts, payroll, VAT registration and tax return

• HMRC must be informed that the company has ceased to trade. If a payroll scheme is open, this will need to be closed with the final balance of PAYE tax and National Insurance being paid or reclaimed as appropriate.
• If the company is VAT registered, you will need to deregister for VAT and complete the final VAT return and questionnaire issued by HMRC.
• Since Payroll and VAT are different departments within HMRC, you should not assume that the change in status sent to one will be passed on. It is best to inform all relevant departments.
• Company cessation accounts must be prepared for the period from the last annual accounts to the final date of trading. These accounts must be submitted to HMRC with a Company Tax Return for the period. The Corporation tax will need to be paid prior to any funds being distributed to shareholders.
• If there is an outstanding Directors Loan account in the financial statements, this may hold up Company closure. You should talk to your accountant.

Once all of the company’s monies have been received and liabilities met, the process will change depending on the route to closure.

• If following the Extra Statutory Concession, the directors will now be able to distribute the remaining company funds and assets to the shareholders in proportion to their shareholding. Once the funds have been distributed the Company bank account can be closed. The director should then submit Form DS01 to the Registrar at Companies House.
• The Registrar at Companies House will advertise the dissolution of the company in the London Gazette. This is likely to be a formality, as there should be no creditors, shareholders or directors to object; three months from submitting the DS01, the company will be struck off and cease to exist.
• The shareholders will need to report their personal gains on their Self-Assessment Tax Return.

If an MVL is being followed the process will be slightly different. Once the cessation accounts are finalized, the Liquidator will begin to draft the formal paperwork for the liquidation. He will advise on how the funds should be withdrawn from the Company bank account and when.

• Liquidation papers will be filed with HMRC and Companies House and assets will be distributed to shareholders and the company closed.

Mitigating the tax bill

Closing your company down and withdrawing the remaining reserves is a chargeable event to Capital Gains tax. Capital gains tax is chargeable at 18% or 28% on your gain depending on whether you are a basic rate or higher rate tax payer. The first £11,700 of gain for 2018/19, is tax free.

You may be entitled to claim Entrepreneurs’ Relief if certain conditions are met:-

• The shares in your personal company that you are disposing of must be disposed (winding up a company constitutes a disposal) while the company is a trading company or within 3 years from the date it ceased to be a trading company. You must have held 5% or more of the ordinary shares and been a director or employee of the company for the qualifying one year period.
• If you are entitled to Entrepreneurs’ Relief, the first £10,000,000 of qualifying gains will be charged at a rate of Capital Gains Tax (CGT) of 10% and any gains over and above this limit will be charged at the standard rates.
• The relief is subject to a lifetime limit of £10,000,000 of qualifying capital gains for each individual (previously £5,000,000 up to 31 March 2011). Because you may be entitled to relief on more than one occasion, it is important that you keep a record of the gains against which you may have previously made a claim. If your qualifying net gains exceed £10,000,000, no further relief is due and the excess over that amount is wholly chargeable at the appropriate CGT rate.

New Targeted Anti-Avoidance Rule (TAAR) from April 2016

HMRC were concerned that following changes to dividend tax in April 2016, there was an increased incentive for shareholders of close companies (i.e. where there are five or fewer shareholders or any number of shareholders who are also directors of the company) to attempt to classify monies withdrawn as capital distributions rather than income.

HMRC introduced new TAAR directed at this situation where they believed some shareholders were treating distributions as capital in nature rather than income in order to obtain a tax advantage.

A distribution from a winding up will be treated as if it were an income distribution where the following conditions are met:

• an individual who is a shareholder in a close company receives from the company a distribution in respect of shares in a winding-up
• within a period of two years after the distribution, the individual continues to be involved in a similar trade or activity.
• the circumstances surrounding the winding-up have the main purpose, or one of the main purposes, of obtaining a tax advantage

These provisions are designed target “phoenixing”, where individuals close their companies to take advantage of the Entrepreneurs Relief and then re-open soon after in the same business. Valid commercial reasons for closing your company such as retirement or moving to a permanent PAYE position, for example, remain unaffected with regards to the Targeted Anti-Avoidance rules.

To find out more about closing your company with Orange Genie, please email accountancy@orangegenie.com or call 01296 468 483.