The IR35 changes will result in many contractors exiting this sector and seeking full time permanent employment.
As a result their Limited Company needs to be finished up and closed down.
For most with very straight forward affairs this will be a very simple process and will be cheap to do.
For some, and to maximise the tax benefit of Entrepreneur’s Relief, the close down will be a little more complex and costly although the outlays are more than outweighed by the benefits.
Prerequisites to the close down process
Before you start to close the company down there are a few things to do:
- The company must not have traded in the last 3 months and it should not have changed its name
- You must have informed HMRC – they will expect final accounts to close of trade and for any taxes to have been settled.
- You’ll need to account for any surplus funds that you intend to extract from the company by way of salary, dividend or capital distribution. You may also want to think about putting surplus funds into a pension which could reduce any profits or even create a loss resulting in a refund of corporation tax. This can be complicated and if you’re uncertain about what to do then you should seek the services of an accountant to help you. This need not cost the earth if you find an accountant who has the experience and expertise in company close downs. They should be able to quickly look at your situation and, with a few simple questions, point you to the most appropriate route to follow to extract excess funds.
- If you have any creditors then these must be told that you intend to close the company down
The Close Down Process
Once you’ve sorted out the prerequisites, the close down process is really simple.
All you need to do is file a DS01 form at Companies House along with the filing fee which is £10 if the form is filed manually or £8 if you file it online which is actually easier to do (click here to do it online).
Ways to extract funds from your company
When it comes to closing the company there is not a “one size fits all” solution. The most appropriate solution depends on how much in the way of surplus funds you have in your business.
Simple and Straightforward
Where the money tied up in your business is relatively small (less than £25k) then you can extract the funds by way of a capital distribution. A capital distribution would suffer Capital Gains Tax at 10% for basic tax payers and 20% for higher rate tax payers although the gain is first reduced by the Annual Exempt Amount (currently £12,000).
Larger amounts involved
Where larger amounts are involved then there are options to be considered such as paying into a pension through the company or liquidating the company to take advantage of a lower tax regime under Capital Gains Tax or via Entrepreneur’s Relief (via a Members Voluntary Liquidation) if applicable.
This is an area not to get wrong. The inexperienced would benefit from appointing a good accountant to handle this on your behalf although do make sure that they know what they are doing and have been through many company close downs including Members Voluntary Liquidation before.