There are many reasons why you could be thinking about finishing your career as a contractor. Maybe you are moving back into full-time employment or perhaps you are thinking of retiring; whatever the reason it is worth planning your exit carefully.
Closing the company
Before closing, the affairs of the company will need to be brought up to date (accounts and tax returns), surplus funds in the company will need extracting and the company, along with its bank account(s), closed down.
What path this takes will depend on your circumstances and how you have planned your exit.
Careful planning in the time before you exit could see you extract more from your limited company than if surplus funds were paid out by way of dividends.
Let’s look at the options available for extracting money from your company on exit.
Dividends and Pension Contributions
During the period prior to exit when the company is still trading pension contributions on your behalf can be made which would be an allowable business expense. Of course, pensions are a complex area and it would be worth seeking independent financial advice if you were to choose this route.
As well as making pensions contributions (whilst still trading) the company can pay out dividends both pre exit and, if the company were to remain open, post exit, even if the company no longer trades. This can provide an income stream within your control into your retirement.
Of course, the regulatory reporting responsibilities for the company would remain (filing accounts, tax returns and the Confirmation Statement) although you could de-register for VAT and payroll.
As a business owner you have worked hard to build up your business. You take certain risks starting and running a business, such as your income not being guaranteed, no sick pay, holiday pay or pensions.
So when you come to sell or exit from your business you may qualify for Entrepreneurs’ Relief. If the surplus in your business is relatively small then you can use the £25,000 capital distribution allowable route which is a simple way to extract funds.
£25,000 Capital Distribution
If you decide that you want to close the company down, and the amount available to distribute in reserves is less than £25,000, you can take a capital distribution from the company. The £25,000 capital distribution could be eligible for Entrepreneurs’ Relief, provided that certain conditions are met and you will be able to deduct your tax-free allowance called the Annual Exempt Amount assuming that you have no other gains in the tax year.
If the Entrepreneurs’ Relief conditions are met then this can mean a tax rate of 10% on the gain after the Annual Exempt Amount is deducted.
Caution must be given here to what is called phoenixing. This is the term used to describe the practice of carrying on the same business or trade successively through a series of companies, in this case to gain a tax advantage through the £25k capital distribution route. Clearly to do this in this situation would be blatant tax evasion.
It may be possible to reduce the amount available to pay out to the shareholders of the company (known as distributable reserves) to under the allowed £25,000 by paying into a pension scheme whilst the company is still trading or by taking dividends as discussed above.
Members Voluntary Liquidation
Where the closure of your business could release larger amounts then it may be worth exploring the Members Voluntary Liquidation (MVL) route to exit. The MVL process is used to wind up the affairs of a solvent company i.e. who could pay its debts.
The word liquidation usually sends everyone running for the hills but in this case it is absolutely nothing to be scared about. An MVL doesn’t leave a mark on your credit history or result in you not being able to act as a director. It is a perfectly good method to use as part of your exit strategy.
The MVL process is typically used where a company has come to the end of its natural life, where reorganisations have occurred or as part of a restructuring process. The process effectively brings the company to a formal end and distributes any remaining assets including cash to its shareholders. The MVL process facilitates a controlled exit allowing the shareholders to release their investment in a tax efficient manner.
One of the first things that happens in the MVL process is that a liquidator is appointed and a statement of solvency is prepared. Whilst this is a complex process with the right team (accountant, tax advisor and liquidator) it isn’t onerous. Of course there is a charge for this, typically around £2,000 to £4,000 for the liquidator plus normal accounting fees for bringing the accounts and tax returns up to date prior to the MVL process starting.
The liquidation fees need to be balanced against the tax efficient extraction of funds, by way of the application of Entrepreneurs’ Relief, from the business on exit.
Pre Exit Planning
Of course it may be worth building up funds in the business prior to exit. Caution does need to be given as HMRC have a dim view of what they refer to as “money boxing”. This is where a company is closed down with large retained profits.
HMRC’s view is that the retained profits could and should have been distributed as dividends (higher tax bill) prior to the close down as opposed to the surplus being part of the MVL process qualifying for Entrepreneurs’ Relief (lower tax bill).
It is essential to work with suitably qualified advisors (accountants, tax advisors and liquidators) during the pre exit planning to make sure that all bases are covered and your strategy will hold up against any HMRC challenge.
Get in touch
If any of the above is of interest then do get in touch for a FREE initial chat about how we can help you to achieve the right exit plan suitable for your needs.
Contact us on 0203 282 7190.