RESOURCES

Closing a UK limited company

Striking off is the simplest way to close a company

There are four main ways that a company can be closed.

  • Compulsory Liquidation: when a creditor forces a company to close.
  • Member’s Voluntary Liquidation: when the members (shareholders) close an active company that can pay its bills.
  • Creditor’s Voluntary Liquidation: when the members close an active company that can’t pay its bills.
  • Striking Off: a process that the members can use to close a company that has not traded for three months or more.

Striking off the company is usually the cheapest and simplest way to close a small company. This note is aimed at giving an overview of the striking off procedure.

Striking off

You can apply to Companies House to have your company dissolved and struck off the Register of Companies providing that it:
  • is solvent;
  • has paid all its debts;
  • hasn’t traded or otherwise carried on a business or sold any stock in the last 3 months;
  • hasn’t changed its name in the last 3 months;
  • isn’t threatened with liquidation; and
  • has no agreements with creditors, like a Company Voluntary Arrangement.

That said, it’s important to note that shareholders will usually pay income tax on any assets or cash that is paid to them as part of the closure process. This is usually tax-inefficient, income tax in the UK can be as high as 45%. For this reason, if there is a significant amount of value in the business, it may be better for owner-managed businesses to appoint a liquidator and follow a Members Voluntary Liquidation process. This allows payments to shareholders to be treated as capital rather than income. The highest capital gains tax rate is 28% and this can be reduced to 10% if Entrepreneurs Relief is claimed. Furthermore, up to £11,700 of capital gain is tax-free in the UK. Therefore, in some circumstances, this can be a much more tax-efficient process.

For this reason, if there is a significant amount of value in the business, it may be better for owner-managed businesses to appoint a liquidator and follow a Members Voluntary Liquidation process. This allows payments to shareholders to be treated as capital rather than income. The highest capital gains tax rate is 28% and this can be reduced to 10% if Entrepreneurs Relief is claimed. Furthermore, up to £11,700 of capital gain is tax-free in the UK. Therefore, in some circumstances, this can be a much more tax-efficient process.

Striking off in practice

In practice, there are quite a few steps that you need to go through to close your company using this process. These are:

Step 1 – Hold a Board and a Shareholders meeting

The first thing to do is to hold a Board Meeting and a Shareholders Meeting to approve the winding up of the company. A special resolution to stop trading should be passed and the directors empowered to take all actions necessary to close the company. Often this step is omitted for single shareholder owner-managed businesses.

Step 2 – Wind up the business

The next thing you need to do is to stop and close all the businesses activities. This deceptively simple statement masks a lot of detail. For example, you will need to:

  • pay all your creditors;
  • cancel all your contracts;
  • make your employees redundant; and
  • terminate your VAT, PAYE and any other registrations.

Obviously, all this needs to be done very calmly and fairly.

Step 3 – Dispose of all business assets

It’s important that you don’t leave money in the company’s bank account or assets in the business as anything that’s left in the company once it has been closed will go to the Crown. For this reason, you need to make sure that any business assets are shared among the shareholders before the company is struck off. At this stage you should only leave just enough cash in the business to pay off any tax or other liabilities.

Step 4 – Wait three months

The next thing you need to do is to wait so that it has been at least three months since your company has traded or otherwise carried on a business. Trading basically means doing anything that your business would normally do. However, it does not include doing things that are necessary to close the business or making payments to settle liabilities.

Step 5 – File your final accounts and tax return with HMRC

If your company has traded and made profits in the past, it is likely that HMRC will require your company to produce a closing set of accounts and submit a final corporation tax return. You don’t need to wait until your normal year-end to do this. You do need to make it clear that the accounts are closing accounts and that they have not been prepared on what is known as the ‘going concern basis’. In practice, this means that you need to make sure that all the assets and liabilities are correctly valued and accounted for. 

If you have tax to pay, then you will need to pay it. If you’ve made a loss in your final year you might be able to offset the tax against profits from previous years and get some tax back. This is known as terminal loss relief.

You can delay filing your accounts and submitting your tax return to after you have applied to Companies House (step 6 below). However, in this case, you run the risk that HMRC may object to the closure.

Step 6 – Apply to Companies House to close the company

Once the three months has passed you need to apply to Companies House to have your company closed (dissolved) and struck off the Register of Companies. There is a standard form to do this called Form DS01.  This form needs to be sent to Companies House, together with a fee of £10. The form also needs to be sent within 7 days to anyone else who could be affected. This includes all the:

  • shareholders;
  • directors that have not signed the form;
  • creditors (including HMRC); and
  • employees that remain in the business.

Completing Form DS01

The form needs to be signed by a majority of the directors.  It’s an offence for them to make a dishonest application and they must make sure that they understand the form and what they are signing. Otherwise, they risk a fine and possible prosecution.

Step 7 – Wait another three months

Once Companies House receives the application you will receive a letter from Companies House confirming that they have received the application. Then, Companies House will publish your request for the company to be struck off in the Official Gazette. Companies House will also update its records to show that a proposal to strike the company off has been received.

If nobody objects to the closure, the company will be struck off the register after 3 months. At this point, another notice will be published in the Gazette and the company will cease to exist. Companies House will update the status of the company to ‘Dissolved’. However, all the information previously submitted to Companies House will remain on the public record.

During this three-month period, it’s important not to contact Companies House as this could be regarded as a sign of life and could delay the process.

Other points to note

  • Closing the bank account: Just before the company is dissolved you should pay out any small amounts of money that remain in the bank account and close the account.
  • Final accounts: You don’t usually have to file final accounts with Companies House once you have submitted form DS01.
  • Companies House penalties: Companies House do not usually pursue late filing penalties after they have received Form DS01.
  • Withdrawing the application: You can withdraw your application during this period if you change your mind. You must withdraw your application if at any time the company fails to meet the eligibility criteria.
  • Keeping records: You should normally keep must keep business documents for 7 years after the company is struck off, eg bank statements, invoices and receipts and accounting records. If the company employed people you should keep copies of its employers’ liability insurance policy for 40 years from the date the company was dissolved.

Striking off is the simplest way to close a company There are four main ways that a company can be closed. Compulsory Liquidation: when a creditor forces a company to close. Member’s Voluntary Liquidation: when the members (shareholders) close an active company that can pay its bills. Creditor’s Voluntary Liquidation: when the members close an […]

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