Who Do You Inform When Closing a Business?

February 20, 2024 / FAQs

There comes a time for most businesses to wind down operations. Some business owners may wish to retire, move on to another venture, or close for a range of other reasons. The question is, how should a business owner close their business, and who needs to be informed, if anyone?

In this article, Clarke Bell will answer these questions, breaking down the process of closing a business, and discussing the options available to you as a business owner.

Preparing to close a business

When the time comes to close down your business, no matter the reason, you’ll need to make some preparations first. Closing a business is a serious affair, with a host of legal requirements that must be followed carefully to avoid receiving any penalties. Before you take any steps to formally close your business, make sure you haven’t missed any of the following:

  • Pay off any outstanding creditors and liabilities, including unpaid tax bills, utilities, and invoices. Failing to ensure all of your company’s liabilities are covered before winding up will obstruct your attempt to close.
  • Collect any outstanding payments owed to your company, e.g. from clients.
  • Notify HMRC that your company will be closed, and will no longer pay Corporation Tax, PAYE scheme payments, and VAT, if applicable. HMRC will then issue a notice informing you of your company’s deregistration date.
  • Separate any assets owned personally from those owned by the company. Transferring company-owned assets to your personal ownership may incur Capital Gains Tax, which can be a nasty surprise if unexpected.

Closing a business as a sole trader

Ceasing trading as a sole trader is fairly simple and straightforward, depending on the size of your business. To cease operations as a sole trader, you will need to inform HMRC of your intentions, change from Class 2 or Class 4 National Insurance rates if you cease self-employment entirely, and sell off any assets related to your business. You may also apply for loss relief, if your business sustained a loss in its final year.

Closing a limited company

Closing a limited company can be a more complicated affair compared to ceasing operations as a sole trader. For a start, it requires directors to agree, as one director cannot unilaterally choose to close a company in the vast majority of scenarios. Directors must also adhere to the checklist mentioned earlier, informing HMRC of their decision to close, and requesting to mark their company ineligible for tax. Once directors receive a response detailing the date on which their company will be deregistered, they may move on to officially closing their limited company.

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What are my options for closing a limited company?

There are several methods available to directors looking to close their limited company, with the most appropriate depending largely on the financial state of the company in question.

Directors of solvent companies (i.e. ones with no debts they can’t pay back) can choose between Members’ Voluntary Liquidation and company dissolution.

For insolvent companies (i.e. ones which do have debts they can’t pay back) a popular option for closing down is Creditors’ Voluntary Liquidation.

Let’s consider these procedures in more detail.

Members’ Voluntary Liquidation

Members’ Voluntary Liquidation (MVL) is an option for directors looking to close their solvent companies. While most solvent companies will be eligible for an MVL, the procedure is especially beneficial for companies with large reserves of retained profits – typically over £25,000. Such companies are best positioned to take advantage of the main benefit offered by the MVL procedure – tax efficiency.

Tax efficiency is the primary benefit offered by the MVL procedure. It allows companies to dispose of assets effectively, ensuring shareholders retain the largest possible portion of their investment. The MVL procedure achieves this tax efficiency primarily through two means:

  1. any funds realised as a result of the MVL procedure will be taxed under Capital Gains Tax (CGT) rates. CGT poses a notably lesser strain on realised profits compared to Income Tax rates.
  2. shareholders may make use of Business Asset Disposal Relief (BADR) to reduce their overall tax burden. Shareholders may apply for BADR on their Self-Assessment Tax Form, up to a lifetime limit of £1 million. This relief, coupled with a Capital Gains classification, can result in a tax rate as low as 10%.

Company dissolution

While an MVL can be great for some companies, it is not always the best solution for others. Smaller companies with little retained profits may benefit more from company dissolution. Company dissolution is a cheaper methods of closing a company, requiring directors to cover the cost of transferring assets from the company, posting notices in the Gazette, and a fee for the submission of a DS01 form. This fee is £10 if done in paper format, or £8 if done via the online portal.

Once the decision to dissolve has been made, directors must inform all related parties and post a notice in the Gazette. Should this be ignored, related parties, such as shareholders or outstanding creditors, may object to the attempted dissolution. This can result in the procedure being delayed, or stopped entirely. Directors may even be accused of misconduct if the attempted dissolution is interpreted as a means of escaping debt.

You cannot dissolve a company if it has outstanding debts.

Creditors’ Voluntary Liquidation

Directors of insolvent companies who are looking to wind down operations must consider procedures other than the aforementioned. Creditors’ Voluntary Liquidation (CVL) is one such alternative, and is commonly used by insolvent companies.

A CVL provides an efficient method of closing a company with debts, and it provide legal protections for both the company and its directors. Directors need to appoint a licensed insolvency practitioner to handle the process, ensuring no loose ends remain at the end of the procedure. Creditors may not mount any legal action against a company once it has been entered into the procedure. Moreover, directors will be better protected against accusations of misconduct, as they have taken the initiative to act in the best interests of creditors.

As with any method of closing a company, directors must inform their fellow shareholders, if applicable, and HMRC of their decision to close. Failing to do so can cause serious issues, especially for a company in significant amounts of debt.

Clarke Bell can help

Closing a company is a significant endeavour. Not only does it mark a sweeping change in a director’s career and personal life, but it also presents a considerable administrative workload. While it is possible to close a company personally, it is exceedingly risky to do so without proper expert assistance. That’s where we come in.

Clarke Bell can be there to help you close down your business when the time comes.

We have more than 29 years of experience in helping companies to close down, and we can do the same for you.

Contact us today for free advice on the best way to close your company.