Limited companies close for various reasons. At the moment a large number of contractors working through their own limited companies are faced with making a decision as to whether to close or not due to the impending IR35 off payroll changes. Many have seen large banking institutions effectively pull out of engaging with limited company contractors from early next year so they are left wondering if it is really worth keeping their limited companies going. There are various pros and cons of keeping a company on the Companies House Register but if you have made the decision that it is time to say goodbye to your limited company you need to ensure that the closure route you choose is the most tax efficient for you own personal circumstances.
Closing a solvent company
If your company has no debts – and most contractor limited companies don’t – then there are two ways in which a company can be closed.
- If your retained profits are less than £25k the company can carry out a capital distribution of the funds. The company can then be struck off the register through a process known as dissolution. Specific eligibility criteria exist which must be met before the strike off can be done and that includes the cessation of trading for three months. There must be no threats of liquidation or formal creditor arrangements in place (e.g. a Company Voluntary Arrangement) and the company must not have changed its name during the previous three months.
- Where the retained profits are over £25k an MVL or Members Voluntary Liquidation will be needed. The first step in this process is to establish that the company is indeed solvent. A Declaration of Solvency will need to be signed to this effect and once a winding up resolution has been passed; a liquidator will be appointed to administer the process. This route requires the appointment of a Licensed Insolvency Practitioner which does mean additional costs but there can be a significant tax advantage if the shareholders qualify for Entrepreneurs Relief. Such ER should enable you to greatly reduce your tax bill compared to taking the retained profits as dividends.
Whichever route is most suitable for you, don’t forget that the capital repayment from either route must be declared in your Self-Assessment.
It is also possible to make your company dormant and through this route there will be the following implications / opportunities:
- You will still need to file accounts and Confirmation Statements. Accounting fees will reduce considerably for those years where you are fully dormant.
- VAT – it would be sensible to de-register to cut down on administration.
- You can continue to take dividends from the company to reduce the retained profits. Obviously seek advice each tax year to determine what a good tax efficient dividend level is.
- In the year that you become dormant, consider whether you wish to fund your pension. This is another way to reduce retained profits and should also reduce corporation tax or even achieve a rebate.
It is certainly a good idea to not rush into anything, see how the current market develops – you have 3 years after trading ceases before you would become ineligible for Entrepreneurs Relief – And make sure you take advice at the time as the tax position can change over time.
Carrington Umbrella are able to offer a complete evaluation service to contractors faced with this dilemma. We will be able to guide you through your options and ensure you make the best and most tax efficient decision.
For more information or to discuss your circumstances contact us on 0203 713 4530 or email nicky.owen@carringtongroup.co.uk
