There are a number of reasons why you may wish to shut down your limited company, such as retirement, or returning to a permanent role. Here, Donald McNaught from Johnston Carmichael examines the options you face when closing down your company and the tax efficiency of each route.
Maintain the status quo
It is not uncommon for contractors to maintain their companies long after they have stopped trading.
This usually allows them to withdraw remaining capital over a number of years.
- No immediate action required.
- Remaining funds can be drawn over a period of time to suit individual shareholders’ circumstances.
- Ongoing compliance costs. The payment of salary and dividends will most likely prevent the company from being treated as dormant. Therefore, you have an ongoing obligation to submit annual accounts, and tax returns.
- Cost of non-compliance and the risk of involuntary strike-off. This could result in remaining assets/funds falling to the Crown and an expensive and time-consuming exercise is needed to restore the company and recover the assets.
- Could take many years to extract all the remaining funds to avoid paying higher rate tax. Meantime cash or other assets remain in the company and are not easily available for individual shareholders unless they are prepared to pay tax on their distributions at their higher rate.
- Company remains on the register and open to potential HMRC enquiries (IR35, etc).
Voluntary strike off
In the event that directors/shareholders wish to avoid ongoing compliance and the costs of liquidation, the directors can apply to Companies House to have the company struck off. This is a very straightforward process with a token administrative fee charged by Companies House.
- No need to submit further annual accounts, returns and tax returns.
- If remaining funds are < £25,000 then final distribution treated as capital, thus potentially allowing the shareholders to access beneficial tax reliefs/treatments.
- Potentially false economy.
- Requirement to withdraw all remaining assets before strike off.
- Remaining assets drawn by way of salary and dividend with any final distribution treated as dividend (if greater than £25,000). The likelihood is that shareholders will pay more tax on any distribution.
- Even if final funds are <£25,000 then missed opportunity with previous distributions. Existing advisers need to be alert to MVL option if the client is anticipating closure.
- Easier for creditors to restore the company to register within 15 years.
Members Voluntary Liquidation (“MVL”)
A more formal way to deal with the company is via an MVL. Utilising the procedures laid down by Insolvency law allows the shareholders to benefit from different, and potentially advantageous tax treatments while also having the peace of mind that the company has been properly dealt with and put to bed.
- If planned correctly, funds that would otherwise have been drawn as dividends or salary could be taken as capital.
- Capital treatment allows shareholders to benefit from their annual CGT allowance (where the first £11,300 in 2017/18 is tax free dependent on other capital gains the shareholder has benefited from) and, if their existing tax adviser thinks they qualify, Entrepreneur’s relief, where the entire balance could be taxed at only 10%.
- Tax savings should outweigh costs.
- Costs significantly by using a contractor specialist (see below – ‘Further Information’).
- Costs more than a straight strike off
- Brief hand over of assets to liquidator
- Time taken to dissolve the company subject to HMRC clearance (but no/minimal involvement by the directors/shareholders by that stage).
Donald McNaught is a partner at Johnston Carmichael, the largest independent Chartered Accountancy firm in Scotland.
His firm has recently launched a new service – ContractorMVLs – designed specifically to help contractors unlock any remaining cash they have in their limited companies – in a tax-efficient way, based around an MVL.
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