When a company is set up (known as incorporated) it is added to the official Register of Companies at Companies House and shown as “Active”. The way to close a company depends on whether or not it can pay its bills.
If it can pay its bills then you can:
- apply to get the company struck off the Register of Companies – this is the most common way used to bring a company to a close and is known as the strike off process
- start a members’ voluntary liquidation (MVL) – a method to extract surplus funds in a business by way of capital rather than income usually with a resulting tax advantage especially if Business Asset Disposal Relief applies (a way of paying a reduced amount of capital gains tax). A Liquidator must undertake the MVL process which will come at a cost. Therefore it is essential to get expert help and advice before deciding to close your company down in this way
If the company cannot pay its bills, meaning that it is insolvent, then there are two ways for your company to be closed down but before the process is started professional advice from an accountant, solicitor or insolvency practitioner should be taken to ensure the most appropriate approach to close down is selected. The methods of close down for insolvent companies are:
- place the company into administration
- arrange creditors’ voluntary liquidation (CVA)
It may be the case that the company is forced into liquidation by its creditors. You could also apply to get the company struck off the Companies Register but only if the company isn’t in liquidation or doesn’t have a CVA in place. In addition you must have closed the company down properly which means telling people that you owe money to that this is happening.
Closing your company by anything other than the strike off process requires expert help and advice. Therefore it is only the strike off process which is described further.
Trading whilst insolvent
If you continue to trade through your limited company whilst insolvent then you could be fined or even face a prison sentence. This is a very serious issue and if, as a director of a company, you find yourself in a position where the company cannot meet its debts then it is imperative to get advice as soon as possible as to the best course of action.
Pre-requisites to close down via strike off
Before you embark on the closure of your company there are some simple things that you must do. Assuming that you are the sole owner of the company (if you’re not then all parties need to agree to the closure) then you can start the close down process if your company:
- hasn’t traded or sold off any stock in the last 3 months
- hasn’t changed the name of the company in the last 3 months
- isn’t threatened with liquidation by creditors who have not been paid
- has no Company Voluntary Arrangement (CVA) or other such agreements with creditors
It is very important to follow these pre-requisites as failure to do so could lead to issues later.
Legal Close Down
Having met the prerequisites and before applying to strike the company off it needs to be legally closed down. This means:
- informing HMRC and interested parties about the close down
- ensuring your employees, if any, are treated in accordance with the rules
- bringing the accounts and tax returns up to date, pay all creditors and lenders, repay any loans to the business, pay any outstanding tax due, de-register for taxes such as PAYE & VAT, extract any surplus funds from the business in the best and right way and then close the business bank accounts
Complete a DS01 form
Having checked the prerequisites and legally closed the company down then the application to strike off can start by completing a form DS01 at Companies House. You can do this online, by following the guidance given and paying a fee of £8 at https://guidedfiling.companieshouse.gov.uk/start?t=DS01
You will need your company authentication code to start the application to strike off. Once you filed the DS01 the process for close down starts. This is a lengthy process with the timescales set in law. These cannot be changed nor can the process be accelerated. Shortly after filing the DS01 a letter will be sent to the Registered Office from Companies House to acknowledge the strike off process has started. Assuming that there were no issues with the data provided on the DS01 application form, the request for the company to be struck off will be published as a notice in The Gazette (the Official Public Record). If nobody objects to the strike off (only usually an issue if there are creditors or anything outstanding at HMRC) then the company will be struck off the register once the 2 months mentioned in the notice has passed. There is nothing for you to do during this time. It’s just a waiting game.
Telling interested parties about the close down
A copy of the DS01 form must be sent to any parties affected by the application to strike off within 7 days. These could include shareholders, creditors, employees, managers or trustees of any employee pension fund and any directors who did not sign the application form.
For further details on how to close down your company properly see https://www.gov.uk/strike-off-your-company-from-companies-register/close-down-your-company.
Company Status
When a company is closed down the status of the company on the Register will change from “Active” to “Proposal to Strike off” (when the appropriate form is filed at Companies House) then “Dissolved” once the close down process has finished. The name of the company as well as all of the details and filings remain on the public record which anyone can see i.e. it does not simply disappear from the record. Once at the status of dissolved the name of the company can be re-used. Once the company is dissolved it no longer legally exists and any assets or liabilities are dissolved along with the company.
How to close your loss making business
You may have started your company with the very best of intentions hoping for it to succeed. However sometimes things do not work out how they should resulting in the need to close a loss making company. If your company is making a loss then there is a “hack” to the formal process which may make things simpler and cheaper by avoiding the need to engage an accountant. Like profit making companies, you should file final accounts and a corporation tax return to include all transactions up to the date that the company ceased to trade – the date of cessation of the business. However, in all likelihood you’ll have little in the way of funds to pay an accountant to do this finding yourself in a catch 22 situation where you want to close the company but can’t afford to do so.
If the company has made a loss but has no debts i.e. it does not owe any money to anyone or any organisation (except for the director or owner), including HMRC or a bank e.g. for a Covid Bounce Back Loan then there is a hack that you could potentially use to avoid having to bring the accounts and tax returns up to date.
Simple Income and Expenditure Statement
The first thing to do is to establish that the company has in fact made a loss and the only way to do this is to draw up a very simple Income and Expenditure Statement– a very grand way of describing the recording of the total income for the company and the cost outlays that have been incurred.
This shouldn’t take you long to do and is worth doing to prove your circumstances and to have on file if any queries are raised at a later date.
All you need to do is:
- Recording the date, amount and a short description list all:
– Business income received
– Business payments made - Total the income and payments – one total for each
- Take the costs away from the income – a negative figure shows that the company has made a loss
Write to HMRC
Once you have your Income and Expenditure account the next step is to write to HMRC to advise them that your company has made a loss and that there is no tax due. The letter could look something like this:
Dear Sir / Madam
Subject: Add the name of the company and the Corporation Tax Reference number here
I write to inform you that I intend to start the close down of the above company within the next 28 days. In the current accounting year, the company has made no profit and there is no tax to pay – see attached income and expenditure account. If you do have any queries or objections to the start of the close down process please do let me know as soon as possible.
Yours faithfully
It should be sent to Corporation Tax Services, HM Revenue and Customs, BX9 1AX and it is recommended that you send it by a tracked postage service so that you have a record of receipt by HMRC for future reference.
HMRC Objection
HMRC may raise an objection to the strike off on the grounds that they want to see the formality of filing final accounts and a corporation tax return in the normal way. If they ask for this you will have to comply and complete the statutory filing needed. You may need an accountant to help you with this but with the completed Income and Expenditure account you can pass this to them to reduce any bookkeeping fees. However in all likelihood, having followed the process above, HMRC will not raise any objections and your closure should pass through without challenge if you meet the criteria. After you’ve given HMRC28 days to object to the strike off then you can start the formal process in the same way as above including closing the company bank account.
Caution – loss makers could get a tax refund
If you have made a profit in the past, subsequent losses including the one for the current year could entitle the company to a corporation tax refund. A loss can be carried back and offset against any profits that were made in the previous 12 month period. Note that this is 12 months and not an accounting period and of course for a refund to be due a profit needs to have been made and tax paid on that profit. The corporation tax refund will be paid to the company meaning that the company bank account needs to remain open until it is received. A director may be able to arrange for the Corporation Tax Refund to be paid to them. So before you dive into the close down of your company do see if you would be entitled to a corporation tax refund. To get the refund you will need to prepare and file accounts and a corporation tax return – something that you may want an accountant to help you with. On a practical level it is only worth considering claiming the refund if the accountant fees are less than the potential amount due.