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Closing down a Limited Company – What To Do

There are two main ways to close down a Limited Company:

  • Strike off – a simple application to Companies House to strike the company off the register. Cheap and cheerful, but slow. Also, creditors can resurrect the company later on.
  • Liquidation – a qualified insolvency practitioner is required for this. The company is formally liquidated. This route is more expensive, but quicker and less risk of things creeping out of the woodwork later.

Tax Treatment

Up until 1 March 2012, by default, when striking a company off, any company funds paid out to the shareholders would be taxed as a dividend, whereas those paid out as part of a liquidation were subject to capital gains tax (CGT).

There was an extra statutory concession C16 (ESC C16), whereby if you asked nicely, HMRC would give you permission to obtain CGT treatment on funds withdrawn under a striking off, to save you the cost of a formal liquidation.

Since 1 March 2012, this has changed. Now, there is no application process. For companies struck off, the tax treatment depends on the bank balance:

Size of bank balance

Under £25,000 – you can automatically obtain CGT treatment on funds paid out if the total is no more than £25,000. For companies with small cash balances this is great news as there’s one less application to make.

Over £25,000 – for companies with over £25,000 in the bank, the entire amount will be taxed on the shareholder(s) as dividends. It’s an all or nothing situation, so (for example) £26,000 couldn’t be treated as £25,000 CGT, £1,000 dividend, it would ALL be dividend.

Under a formal liquidation, all funds paid out will be taxed at CGT rates, which for the majority of people leads to significantly lower tax bills. Therefore for those with bank balances above £25,000, a members voluntary liquidation may be an appealing option.

Until recently, a members voluntary liquidation would typically cost about £4,000, even for a very simple case. However, since this change in legislation, it has brought about a new market for cheap and cheerful liquidations for very simple, solvent companies.

To ease the financial burden, Maslins are proud to announce a sister company, MVL Online Ltd, offering Cheap Members Voluntary Liquidations for Limited Companies with no liabilities and no assets other than cash in the bank, for £995+VAT plus statutory disbursements.

Be aware there are some anti avoidance rules that attempt to prevent someone doing the above repeatedly. In short, you can’t start a similar business within 2 years of liquidating the old one, or you risk losing the capital gains tax treatment (instead the funds being taxed as dividends).

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