It’s an all-too-common story. Times were good, you had new clients coming out of your ears, more work than you could handle and your bank account was overflowing. You did the sensible thing and formed a limited company to make the most of your earnings – clever you.
But then; disaster. Maybe your biggest client went belly-up, or you simply realised you can’t stand your colleagues’ awful habits. Your income plummets, and suddenly the extra paperwork and Companies House filings just don’t seem worth it – you pine for the days of sole tradership and finally, after much deliberation, you decide to close down your limited company.
How do you do that, exactly?
Get everything squared away
Although you’ll go on conducting your business as a sole trader your limited company, as a legal entity, must have all its loose ends tidied away. This means settling any outstanding bills, and collecting any owed invoices, and making sure you make provisions for any running costs that may be incurred between now and when your company is legally wound-up (for example, if you’re paying an accountant to finalise your last batch of returns or employing some credit control services to round up those late payers).
The good news is that these can be treated as legitimate business expenses, and so can offset your final tax bill.
You’ll need to file form DS01 with Companies House in order to ‘Strike off/Dissolve’ your company. This can only be done after the company has not been trading for 3 months.
If you are VAT Registered, you will need to inform HMRC of your intention to de-register by completing a VAT 7 form. Once this form is received, HMRC will contact you with your de-registration date. You must also complete a final VAT Return that takes into account things such as leftover stock or any equipment your business owns.
You must inform HMRC that your company is no longer trading so they do not issue further reminders for Corporation Tax.
If you operate a PAYE Scheme HMRC will also need to be told that it is no longer in operation, and it will need to be closed down.
If you’re operating a limited company as a freelancer there’s a good probability your equipment (laptop etc.) is owned by your company for tax reasons – if you take possession of company equipment personally when your company is would up you may need to pay Capital Gains tax on those items.
Dissolving a limited company is, as you can see from the above, a bit of a hassle. There are other considerations too – if you de-register from the Flat Rate VAT scheme, you cannot re-register for a year. If the good times return and you decide to re-incorporate this could mean you’re out of pocket.
If you think you might want to trade through your limited company again soon, you always have the option of putting it “on hold”. Instead of informing HMRC that you intend to close the limited company down you can make the company “dormant”. You will still have to file certain tax returns, but they will be “nil returns”, meaning you just report a load of zeroes to HMRC to show them you’re not trading.
You can work as a sole trader outside your limited company in the meantime, and return to working through your limited company when it makes financial sense (although bear in mind this will make your Self Assessment rather more complicated).