How to close down a limited company
The two main ways of ending a company in the UK depend on whether there is sufficient money in the company for it to be able to pay all of its debts. Shortly after it stops trading, these debts may include:
- Corporation tax for the final period
- VAT for the final period
- Outstanding PAYE and National Insurance on payrolls
- Final accountancy fees
- Any remaining amounts owed to trade suppliers
- Bank loans or overdrafts
- HP or lease agreements, or any other ongoing commitments
- Money owed to directors or shareholders.
If the company cannot pay its debts, it will ultimately enter into one of the different types of insolvency proceedings. This usually involves an insolvency practitioner either taking over the company in order to keep it running while its finances can be restructured, or selling off the company assets in an attempt to raise money to pay the creditors. The conduct of the directors may also be investigated. More information is available on the Insolvency Service website.
Assuming that the company can pay all of its debts, there is a simplified way of closing it down. In a typical case, the steps would be as follows:
- The company should carry on no further business, and undertake 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.
- A final payroll will be run for all of the staff. They will be issued with P45s. At some stage the company will need to make a final return of payroll information to HMRC.
- The company will apply to HM Revenue & Customs to 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.
- 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. They should be informed that the company has stopped trading and has no further taxable income, so that they do not object to the company being closed down.
It is not usually practical to prepare the final set of accounts immediately after the company has stopped trading, as there may be some final expenses in the following weeks or months that may need to be included.
- Any corporation tax should be paid from the company bank account. This is usually the last payment to be made. 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.
It should be clear by now that it is rarely possible to have the process fully wrapped up within a few weeks of making the decision to close down the company. It is normal to leave the company almost dormant over a period of months, while all the formalities are dealt with.
- 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, unless there are alternative provisions in the articles of association (this would be unusual). The company should consider how to extract these funds in the most tax-efficient way; there are some ideas here.
- After 3 months of inactivity, and once all the debts have been paid, the directors will be able to make an application to Companies House under Section 1003 of the Companies Act 2006 to have the company struck off. Companies House make a charge of £10 for this, and the application form (DS01 Striking off application by a company) can be downloaded from their website.
As an alternative to the company being fully closed down, it can remain ‘dormant’ on the register. Leaving the company dormant typically costs less than £100 per year, and it means that it can be used again, for any other purpose, without any delay or set-up cost. It also serves to reserve the company name for future use, and an older company has slightly more financial credibility than one that has just been incorporated. If the company is not going to be used for at least 3 years, then it is usually more cost effective to close it down, and then incorporate another company if one is needed.