- Why you should not simply drop your UK-registered company
- How to close a limited company without paying tax
- Voluntary strike-off
- Applying for voluntary strike-off
- Pluses and minuses of voluntary strike-off
- Members’ voluntary liquidation
- MVL pluses and minuses
- Who is eligible for business asset disposal relief?
- Closing an insolvent company
Great Britain is a popular jurisdiction with entrepreneurs from other countries registering companies there. If you have a company registered in the UK, you can find some business benefits in the country (including tax incentives) that are probably unavailable in your home country.
However, no company can last forever. Time may come for you to close your UK-based company. Below we discuss how you can close down a limited company without paying tax or paying minimal tax. There are certain procedures that can help you achieve this goal.
There can be different reasons why you want to dissolve a limited company that you have in the UK. For example, the market situation may change significantly, which may cause your company to become unprofitable. The tax requirements can also change. Sometimes a company can be set up for the sake of making a single business deal. When the deal has been made, the company needs to be closed. A limited company may also have to be liquidated if serious disagreements between the company founders have arisen. Or you simply may have lost interest in the business area that your UK-based company works in.
Moreover, the reason for dissolving a limited company doesn’t necessarily have to be an unpleasant one. Maybe you want to close the company because you want to register a new company in an offshore jurisdiction where the conditions for doing business and the tax benefits are even more attractive. If this is the case, Offshore Pro Group experts will be delighted to guide you in the process.
Why you should not simply drop your UK-registered company
In case you have lost interest in your limited company located in Great Britain, you may be tempted to simply stop paying any attention to it and just forget about its existence without making any effort to close your company down. Please beware that dropping your UK-based company would be a bad idea.
The most important reason why you shouldn’t leave your company functional on paper even though it has ceased being active in reality is the reporting requirements. Every company that is on the Register in the UK has to file annual reports and pay some tax. You could hire an accountant to file zero-turnover reports for you every year but you will have to pay something to him or her. Besides, if a company remains registered, small annual fees and tax are due anyway.
If you choose to leave your UK-based company totally unattended, you are going to feel fine for a couple of years. But after several years, the British tax authorities’ attention is certainly going to be attracted to your inactive company that has been paying no tax. Do you believe the tax authorities are going to put up with a legal entity paying no tax? Probably not. So, you may get yourself in hot water if you simply drop your limited company in the UK without officially liquidating it and paying the outstanding tax.
How to close a limited company without paying tax
It is possible to dissolve a limited company registered in the UK without paying tax but only if you keep within the limits of your annual tax free allowance. There are two main methods of liquidating a limited company that is solvent. These are: 1) voluntary strike off and 2) Members’ Voluntary Liquidation (MVL). Which can be the most efficient method in terms of tax?
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A voluntary strike-off can bring certain tax benefits, but the amount of share capital distributed amongst the company shareholders is the key factor here. It will determine if this method of company liquidation is the most appropriate one in your situation from the tax viewpoint.
If the share capital is below 25,000 British pounds, capital gains tax is payable on it. Now, the capital gains tax rate is lower than the income tax rate. In case the amount of the share capital exceeds 25,000 pounds, it is considered an income and a corresponding tax is due.
Applying for voluntary strike-off
To apply for voluntary strike-off, you have to fill out the DS01 form and submit it to the Registration Chamber in the UK. Your limited company shall have been inactive for at least three months prior to the submission of the application. So, a working company cannot be voluntarily struck off.
Only certain types of business activities can be performed during the last three months before filing the application for company closure. These include:
- Settlement of debts;
- Actions required by the law (such as tax payments, for example);
- Sale of some company assets (excluding ownership shares).
If your limited company has undistributed profits at the time of liquidation, they can be used to pay dividends and probably part of the director’s salary.
When does the voluntary strike-off option become unavailable? When it is undergoing bankruptcy procedures.
Pluses and minuses of voluntary strike-off
Pluses: Voluntary strike off is an informal process and it may not even require any professional assistance. The company founders can file an application on their own. If the amount of the share capital is lower than 25,000 pounds, this should be the best way of closing your limited company registered in the UK for tax savings.
Minuses: If the amount of the share capital is higher than 25,000 pounds at the moment of the company closure, the tax on the outstanding amount is going to be considerable. In this case, the MVL may be a more tax-efficient method to choose.
Members’ voluntary liquidation
Members’ voluntary liquidation (MVL) is a method of closing down a limited company that is used rather often. It offers considerable tax benefits if certain conditions apply. When using this method of company liquidation, you don’t have to pay a tax on the amount within your annual tax-free allowance. Besides, you can also offset company business losses against some gains, which will lower the amount of tax that you ultimately have to pay.
There is one more tax incentive available in the UK. Previously, it was called ‘entrepreneurs’ relief’ and now it has been renamed to ‘business asset disposal relief’. This is a way of reducing the amount of tax that you pay when closing a company even more. Please note that we are not saying that you can close down your limited company without paying ANY tax. We are only saying that you can pay the tax at the rate of 10% if you are eligible for the tax relief.
If you choose MVL as the method of your limited company liquidation, you’ll have to hire an insolvency practitioner who has a license to provide the service. Understandably, this involves additional costs but they may well be lower than the amount you can save on the tax. Professional assistance can contribute to tax efficiency, among other things!
Please apply for our professional assistance in company liquidation. We will be even happier to help you establish a new company in an offshore jurisdiction. We have years of experience and hundreds of happy clients.
MVL pluses and minuses
Pluses: if your limited company has a lot of undistributed profit at the moment of liquidation, the MVL method is going to be more tax-efficient in comparison to voluntary strike-off.
Minuses: The MVL process is going to take more time (up to 12 months in some cases) and you have to pay the insolvency practitioner.
Who is eligible for business asset disposal relief?
The business asset disposal relief is a tax incentive available to private individuals rather than business companies. To be eligible for the tax relief, you have to meet some requirements.
The following characteristics shall have been applicable to you during the last two years prior to the moment of company liquidation:
- You have held an office in the company;
- You have had at least 5% of company the share capital and at least 5% of voting rights at the moment of company liquidation;
- You cannot exceed your lifetime capital gains limit of 1 million pounds. If you do, you have to pay the capital gains tax at the full rate on the amount above this threshold.
Closing an insolvent company
If the company that you want to close has debts, the creditors’ interests are prioritized over the interests of the company shareholders. In other words, you have to clear off company debts before you can have any of the liquidated company’s assets.
If a creditor gave you a loan against a business asset, the asset would go to the creditor before the company can be closed. If any company assets remain, they are sold at an auction to clear off as many debts as possible. When there are no assets to sell anymore but some debts still remain, they are written off. It often happens that unsecured creditors are left with nothing when an insolvent company is closed.
The formal process of liquidating a company that has only debts and no assets is called Creditors’ Voluntary Liquidation (CVL). Similarly to the situation of company liquidation through the MVL process, appointment of an insolvency practitioner (with a license) is required.
What is the most tax efficient method of closing a limited company? It mostly depends on the amount of capital that the company has at the time of liquidation. Zero tax is seldom paid when a limited company is closed down. However, there are certain legal procedures in the UK that allow minimizing the amount of tax paid.
If you would like to close a limited company in the UK while avoiding tax or paying a small tax, please do not hesitate to request our assistance in the matter by writing to email@example.com. We will also gladly advise you on other tax matters.