Can you close a limited company without paying tax in the UK?
Many company owners wish to close a limited company without incurring tax liabilities. When closing a limited company, it’s essential to minimize tax liabilities. One effective approach is to make the company dormant before closing, ensuring there’s no tax due while keeping the business active but non-trading. Closing a company when it’s already dormant can also help avoid tax obligations.
If the company has outstanding tax liabilities or assets, taxes might be due upon closure. Planning ahead and understanding the implications can help business owners navigate the process, ensuring compliance and managing any potential tax payments efficiently.
This article explores strategies to minimize tax obligations, including making a company dormant to avoid tax while still keeping it operational, and closing a company when it’s already dormant to prevent tax payments.
What is a dormant company?
A dormant company is an inactive company for Corporation Tax by HMRC, meaning it does not engage in business activities or generate income. While a company remains dormant, it is exempt from paying Corporation Tax. Additionally, there will be no tax obligations for dividends, income, or capital gains as long as no financial transactions occur, such as withdrawing money from the company or selling shares. This status helps maintain the company without incurring tax liabilities during periods of inactivity.
HMRC and Companies House have slightly different definitions of a dormant company. According to HMRC, a dormant company is one that:
- Has stopped trading and has no other income, such as investments;
- Is a new limited company that hasn’t started trading yet, so tax returns aren’t required until trading begins; or
- Is an unincorporated club or association run for the benefit of its members and owes less than £100 in Corporation Tax.
According to Companies House, a dormant company is one that has had “no significant accounting transactions during the accounting period.” This means it cannot have:
- Generated income
- Earned bank interest
For taxation purposes, the HMRC definition is the most important.
Does a dormant company need to pay tax?
Dormant companies don’t pay taxes while considered dormant by HMRC. A company remains dormant for tax purposes until it starts trading, with no need to file tax returns during this time. Once trading begins, the company must inform HMRC within three months. If trading stops, the company becomes “non-trading” but is classified as “dormant for Corporation Tax” by HMRC, which allows this status to last for up to five years without needing to file further tax returns.
How do I notify HMRC that my company has become dormant?
You should inform HMRC within three months if your company has become dormant. You can do this by phone or post, using the 10-digit Unique Tax Reference.
You can find more information on contacting HMRC.
Alternatively, after forming a new company, HMRC will send a CT41G form to the company’s registered office address. Complete the CT41G Dormant Company section of this form and return it to HMRC to notify them that the company is dormant.
What are the tax implications of completely shutting down a company?
As mentioned earlier, a dormant company will remain on the official register of companies unless it is shut down entirely and struck off.
If a business is insolvent (unable to pay its debts), it can consider one of three options:
- Put the Company into Administration: This involves granting a Licensed Insolvency Practitioner full control of the business. The practitioner will attempt to restructure the company to make it profitable enough to repay creditors. If restructuring is not possible, they may sell the company as a going concern or liquidate it to pay off creditors. Directors and shareholders are not personally responsible for the company’s debts unless they have made personal guarantees or acted unlawfully.
- Arrange a Creditors’ Voluntary Liquidation (CVL): This involves having a Licensed Insolvency Practitioner oversee the company’s liquidation. Before the process can begin, 75% of shareholders (by share value) must agree. This option is suitable when there is no feasible way to make the business profitable, and the majority of shareholders concur.
- Request a Compulsory Liquidation: This occurs when a company owes at least £750 and cannot pay it. Unlike the other two options, this process involves the courts and legal fees, making it more expensive and complicated. Creditors can initiate this process by filing a winding-up petition if they can prove the company owes them more than £750. However, if the company initiates this liquidation, 75% of shareholders (by share value) must agree to the motion, similar to a Voluntary Liquidation.
If a business is solvent (able to pay its debts), there are two ways to strike it off the register: Voluntary Strike Off and Members Voluntary Liquidation (MVL).
We will explore these options below, including their tax efficiencies.
*If a company is insolvent, it must follow a Company Voluntary Arrangement or a Creditors’ Voluntary Liquidation (CVL). If these options fail, creditors can initiate a Compulsory Liquidation.
Voluntary strike-off, also known as “informal liquidation” or “winding up,” involves requesting Companies House to remove a limited company from the register of companies.
Before applying for a voluntary strike-off, a company must meet certain conditions:
- The company should not have traded or conducted business in the previous three months.
- The company should not have changed its registered name in the previous three months.
- There should be no threats of liquidation or any agreements with creditors (e.g., CVAs) in place.
If a company meets these conditions, certain preliminary steps must be taken before requesting it to be struck from the register:
- Make staff redundant, ensuring compliance with all regulations, and settle any outstanding salaries and holiday pay. Close the payroll scheme and notify HMRC that the company no longer employs staff.
- Distribute business assets to shareholders, as any remaining assets after the company is struck off will automatically pass to the Crown.
- Submit the necessary statutory accounts and a final company tax return to HMRC, clearly indicating that these are the final trading accounts and that the company will soon be dissolved.
- Settle all outstanding tax liabilities, such as Corporation Tax, in full.
- Close business bank accounts and transfer any website domain names associated with the company.
The strike off process
After completing these preliminary steps, you can apply to Companies House to strike the company from the official register.
The directors must formally agree to close the company by passing a resolution at a board meeting or through a written board resolution. Once the decision is official, fill out Form DS01, have it signed by the majority of the company directors, and submit it to Companies House.
A copy of the strike-off application should be sent within seven days to anyone who might be affected, including creditors, employees, shareholders/members, trustees or managers of employee pension funds, and any directors who did not sign the application form.
If the application for voluntary strike-off is accepted, a notice will be published in the local Gazette, allowing interested parties to object. If there are no objections, a second notice will be published two to three months later, announcing that the company has been officially dissolved.
Copies of all relevant business documentation, including bank statements, invoices, and receipts, should be retained for seven years after the voluntary strike-off. If the company had any employees, copies of the employer’s liability insurance policy and schedule must be kept for 40 years after the date of dissolution.
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Tax implications of Voluntary Strike Off
Profits up to £25,000
Here’s the passage rewritten for clarity and conciseness:
If a company’s retained profits are £25,000 or less, all shareholders will pay the applicable level of Capital Gains Tax (CGT).
There is an annual CGT allowance, which is the amount of gains that can be made without being subject to any tax. This allowance is currently £3,000 for the tax year 2024-25.
Any gains exceeding the CGT allowance will be taxed at the relevant rate based on your Income Tax band. For the tax year 2024-25, the rates are:
- Basic rate tax band: 10% CGT (or 18% on gains from residential property or carried interest)
- Higher and additional rate tax bands: 20% CGT (or 24% on gains from residential property and 28% on carried interest) on any amount above the basic tax rate.
Eligible directors may qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), which allows them to pay 10% CGT instead of the standard rates. This relief is typically available if a director holds at least 5% of the shares and voting rights.
If your company has never traded or had any significant financial transactions, you can close it via a voluntary strike-off without owing any tax.
Alternatively, if your company has traded but is up to date with its tax payments and has been dormant for some time, you can voluntarily strike it off without owing any tax.
Profits over £25,000
If the company’s retained profits exceed £25,000, all shareholders must pay personal tax on the profits at their applicable personal rates.
These profits are typically distributed as a final dividend. Directors receiving dividend payments on shareholdings must pay tax on any amount exceeding the dividend allowance (£500 for 2024-25).
The tax rate on dividends depends on the individual’s Income Tax bracket but is lower than the equivalent rates for salary payments. The current rates are as follows:
- £12,571 to £50,270 (Basic rate): 8.75%
- £50,271 to £125,140 (Higher rate): 33.75%
- Over £125,140 (Additional rate): 39.35%
If some of the retained profits are paid as a salary instead of dividends, the Income Tax rates are as follows:
- £12,571 to £50,270 (Basic rate): 20%
- £50,271 to £125,140 (Higher rate): 40%
- Over £125,140 (Additional rate): 45%
Income Tax rates differ if you live in Scotland.
For the tax year from 6 April 2024 to 5 April 2025, the standard Personal Allowance, which is the amount of income that can be earned tax-free, is £12,570. This allowance is the same for taxpayers across the UK.
Closing a limited company by Members’ Voluntary Liquidation (MVL)
Members’ Voluntary Liquidation (MVL) is an alternative method for closing down a solvent company. It is generally considered to be a more tax-efficient option compared to a Voluntary Strike Off.
Since a liquidator must be appointed to oversee an MVL, the process tends to be more costly. However, if the retained profits to be distributed among shareholders exceed £25,000, an MVL typically provides a more tax-efficient solution.
MVL process
A majority of the company directors must sign a Declaration of Solvency, a statutory declaration confirming that the company can repay its debts, including any interest, within a specified timeframe not exceeding 12 months.
After the Declaration of Solvency is made, an Extraordinary General Meeting must be held within five weeks. During this meeting, a Special Resolution is passed to officially approve the liquidation and appoint a liquidator.
Within 14 days of their appointment, the liquidator must notify Companies House and publish a notice of their appointment in The Gazette.
The liquidator then takes control of the company during the MVL process and carries out duties such as collecting and distributing assets accordingly.
The main tax advantage of using MVL to close a limited company, as opposed to a Voluntary Strike Off, is that the distribution of retained profits among shareholders is subject to Capital Gains Tax (CGT) instead of dividends tax or income tax.
Unlike Voluntary Strike Off, MVL applies CGT to all profits, regardless of whether they exceed £25,000.
Business Asset Disposal Relief is also available under MVLs, providing additional tax savings.
Targeted anti-avoidance rule
It is important to note that MVL cannot be used by directors who plan to set up another company after closing their current limited company and extracting the profits.
This practice, known as “phoenixism,” was relatively common until 2016, as it involved a new company rising from the ashes of the old one. However, the Finance Act 2016 introduced a Targeted Anti-Avoidance Rule (TAAR) to prevent phoenixism.
TAAR treats any capital distributions made through MVL as dividend distributions and seeks to reclaim any avoided tax when the following conditions are met:
“Condition A: The individual receiving the distribution had at least a 5% interest in the company immediately before the winding up.
Condition B: The company was a close company at any point during the two years leading up to the start of the winding up.
Condition C: The individual receiving the distribution continues to engage in, or is involved with, the same trade or a similar trade as that of the wound-up company at any time within two years from the date of the distribution.
Condition D: It is reasonable to assume that the main purpose, or one of the main purposes, of the winding up is the avoidance or reduction of an Income Tax charge.”
While MVL is generally a more tax-efficient option for shareholder directors looking to close a limited company and extract profits, it is not a viable option for those seeking to simply avoid taxes and continue in the same line of work.
Voluntary Strike Off vs. MVL: Which is more tax efficient?
For retained profits of £25,000 or less, opting for Voluntary Strike Off is generally more advantageous because it saves the cost of hiring a liquidator. However, if profits exceed £25,000, MVL typically offers greater tax efficiency, although the expense of a liquidator should be considered.
Shareholder directors planning to start a similar business within two years should choose Voluntary Strike Off since TAAR eliminates any tax benefits from using MVL.
Do you have any other questions?
We’ve covered the key steps involved in closing a limited company without paying tax in the UK. If your company is dormant and up to date with all taxes, you may be able to close it through a Voluntary Strike Off without owing further tax. Alternatively, Members’ Voluntary Liquidation (MVL) offers a more tax-efficient route for solvent companies with retained profits.
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