Closing down a limited company – options for contractors

This article was originally written by Donald McNaught of Johnston Carmichael and has been updated by the Contract Eye editorial team.

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.

Pros

• No immediate action required.
• Remaining funds can be drawn over a period of time to suit individual shareholders’ circumstances.

Cons

• 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 the remaining assets or funds falling to the Crown, and an expensive, time-consuming exercise would be needed to restore the company and recover those assets.
• Could take many years to extract all the remaining funds to avoid paying higher rate tax. In the meantime, cash or other assets remain within the company and are not readily available to 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, Corporation Tax, etc).

Voluntary strike off

If directors or shareholders wish to avoid ongoing compliance and the costs of liquidation, they can apply to Companies House to have the company struck off.

This is a straightforward process with a small administrative fee charged by Companies House.

Pros

• No need to submit further annual accounts, returns and tax returns.
• Cheap
• Quick
• If remaining funds are less than £25,000, then the final distribution can normally be treated as capital rather than income, potentially allowing shareholders to access more favourable tax treatment.

Cons

• Potentially false economy.
• Requirement to withdraw all remaining assets before strike off.
• Remaining assets drawn by way of salary or dividend, with any final distribution treated as a dividend if greater than £25,000.
• Even if final funds are less than £25,000, there may be a missed opportunity if earlier distributions could have been structured more efficiently.
• Easier for creditors to restore the company to the register within 15 years.

Read more in our guide to voluntary strike off

Members Voluntary Liquidation (“MVL”)

A more formal way to deal with the company is via a Members’ Voluntary Liquidation (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 closed.

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Pros

• 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 the annual capital gains tax allowance (currently £3,000) and potentially Business Asset Disposal Relief (BADR), where qualifying gains may be taxed at 18% (2026/27 tax year).
• Tax savings should outweigh costs.
• Costs can be reduced by using a contractor specialist.

Cons

• Costs more than a straight strike off.
• Brief handover of assets to a liquidator.
• Time taken to dissolve the company, subject to HMRC clearance.

Important tax considerations

Contractors should also be aware of the Targeted Anti-Avoidance Rule (TAAR), introduced to prevent so-called “phoenixing”.

If a director closes a company, extracts funds as capital, and then starts a similar business within a short period, HMRC may treat the distribution as income rather than capital.

This means the expected tax benefits of using an MVL may not apply.

Further Information

Donald McNaught is a partner at Johnston Carmichael, the largest independent Chartered Accountancy firm in Scotland.

His firm launched a service called ContractorMVLs designed specifically to help contractors unlock any remaining cash in their limited companies in a tax-efficient way using an MVL.