Do I Have To Pay Tax If I Close My Company?

February 6, 2024 / Business Insolvency

Winding down operations can sometimes be the best move for a company and its directors. Doing so is often the natural course of a business, affording directors the opportunity to retire, pursue other ventures, or re-enter the workforce in a salaried position. Closing can also be the best course of action for companies that have seen their profits decline, or have even entered a state of insolvency. Regardless of the reason, any director looking to close their company will want to keep costs low where possible. For this reason, directors should consider whether they must pay tax when closing their company, and if so, whether the bill can be reduced.

In this article, Clarke Bell will discuss taxes as they relate to closing a limited company, the cases where tax may be applied, and what you can do to ensure tax efficiency.

(*Clarke Bell are not tax experts. You should speak to a tax expert about your taxes.) 

Will I always pay taxes when closing a company?

When closing a company, tax is often applied when shareholders profit from the procedure. For example, when assets belonging to the company are sold, or cash accounts are drained, the proceeds will be distributed amongst shareholders if the company is solvent. The proceeds will then be taxed, with the exact percentage depending on certain factors.

However, not every company looking to close is solvent. When closed, any funds extracted from these insolvent companies will be distributed amongst creditors, rather than shareholders. In these scenarios, shareholders are not likely to receive much, if anything. As such, shareholders are not likely to be taxed when closing or liquidating an insolvent company, though certain costs may still be incurred depending on certain factors.

What tax do I pay when closing via Members’ Voluntary Liquidation?

Members’ Voluntary Liquidation is a procedure commonly used by directors of solvent companies. It is an HMRC-approved way for closing down a company, allowing for the efficient liquidation of a company and the distribution of its profits, and is one that is especially well-suited to companies with assets over about £25,000. Such companies can make better use of the benefits provided by the MVL procedure, making it easier to justify the costs involved.

As the MVL procedure aims to liquidate assets and distribute the profits to shareholders, including directors, tax is necessarily involved. However, the tax imposed on gains made during an MVL is comparatively less than under other procedures, and shareholders can take certain measures to further reduce the overall tax burden. Namely, shareholders may apply for Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief.

If applicable, this relief can result in shareholders greatly reducing their tax bill at the end of an MVL, assuming they hold at least 5% of the company’s shares and are entitled to at least 5% of the proceeds raised during liquidation. If these criteria are met, shareholders may apply for BADR on their Self-Assessment form. Once applied, BADR can reduce a shareholder’s tax bill down to as little as 10%, if done in conjunction with the MVL procedure. Note that BADR has a lifetime limit of £1 million, and can only be applied to gains at or below this limit.

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What tax do I pay when closing via company dissolution?

Closing a company via dissolution is a viable and commonly utilised alternative to Members’ Voluntary Liquidation. This procedure lacks the same tax benefits afforded by an MVL, but it can be very cost-effective. Directors can initiate a company dissolution once they have the consent of the board, and have submitted the DS01 form. This form can be submitted at a small fee of £10 in paper format, or £8 online. After having done so, directors must post a notice in the Gazette to ensure all related parties are properly notified of the upcoming dissolution.

Assuming no objections to the upcoming dissolution are made, you will be able to transfer or liquidate assets, empty accounts, and formally close the company. Note that all assets should be removed from company ownership before the company is closed. Any assets that remain once the company is removed from the register will be considered “bona vacantia”, or without owner, and transferred to the Crown.

By closing your company via company dissolution, any gains will be taxed under Income Tax rates, rather than Capital Gains Tax rates. As such, these gains will be subject to a larger percentage of tax, potentially leading to a larger tax bill overall. However, while shareholders might be paying a higher percentage of tax, the low cost of the procedure may lead to lower overall costs, especially for companies with fewer assets.

What tax do I pay when closing via Creditors’ Voluntary Liquidation?

Creditors’ Voluntary Liquidation (CVL) is available to directors looking to close their insolvent company (i.e. one which cannot pay its debts). It affords directors a reliable framework with which to close their company, while still upholding their obligations as directors. Once the board agrees to place the company into the CVL procedure, directors may appoint a licensed insolvency practitioner of their choosing (like Clarke Bell). This insolvency practitioner will assume the role of liquidator, essentially superseding the authority of directors in order to properly carry out the CVL procedure.

Once in this position, the liquidator will dispose of company assets, empty accounts, and collect any other funds the company may have. The proceeds of doing so will be distributed amongst outstanding creditors according to a repayment hierarchy. Once all possible payments have been made, the company will be wound up and removed from the Companies House register. If any debts remain at this stage, they will be written off. For a more detailed look at the CVL procedure, read our complete guide to the process.

As Creditors’ Voluntary Liquidation is a procedure for insolvent companies, meaning it results in no profits for shareholders, directors will not have to pay taxes in most scenarios. In fact, it is entirely possible that tax arrears owed by the company are written off if such debts cannot be repaid. That said, if your company is insolvent and in tax arrears, it is vital you act swiftly to avoid the situation from being taken out of your hands.

Clarke Bell can help

Closing a company is a common, yet strenuous, endeavour. Regardless of procedure, it requires a strict adherence to protocol and the law, with even small infractions holding the potential for severe legal consequences. Moreover, any director would wish to keep costs low, and utilise tax-efficient methods where possible. Clarke Bell can help you in both of these areas.

Clarke Bell has more than 29 years of experience in helping companies close using the most effective methods possible, and ensuring shareholders reach the best outcomes available. We can do the same for you.

Don’t hesitate to contact us today for a free, no-obligation consultation and find out exactly what we can do for you.