Can You Close A Limited Company To Avoid Tax?
If you are wondering whether or not you can close a limited company to avoid tax, you will find the answer to your question in the following blog post. In addition to this, we will also discuss tax-efficient ways of closing a limited company; depending on your circumstances and the company’s financial situation. In the end, we will review essential tax liabilities that must be taken care of to avoid being pursued for deliberate evasion of tax by HMRC.
Can You Close A Limited Company To Avoid Tax?
Yes, you can close a limited company to avoid tax; provided that you meet the following conditions:
- pay off any outstanding loans
- settle accounts with creditors and suppliers
- distribute any remaining assets to shareholders
To close a limited company to avoid tax still requires certain legal and financial procedures that can ensure that debts and obligations are settled and that the company’s assets are distributed appropriately.
In some cases, one may be able to liquidate their company’s assets and use the funds generated from the sales proceeds to settle debts and distribute the remaining funds to shareholders.
This can be done without incurring additional tax liabilities. However, if someone chooses to deliberately avoid any of the essential tax liabilities that are due upon a solvent company and closes down their limited company without paying any of the applicable taxes, they can be pursued for tax evasion by HMRC.
Depending on whether or not a limited company is solvent or insolvent at the time of closure, the following taxes may need to be paid for a legal dissolution of the company:
- Corporation Tax
- Capital Gains Tax
- Income Tax (applies to directors and shareholders)
- VAT (if the company is VAT registered)
Which Taxes Must Be Paid Before Closing A Limited Company?
The taxes that must be paid before closing a limited company depend on the nature of the business that the company has undertaken and its individual circumstances.
For instance, if you are running a limited company and it ceases to trade, you will need to make sure that a final corporation tax return is filed; which covers the period from the last accounting period up to the date of closure.
Suppose a limited company has certain business assets, such as property or shares, and they have increased in value since their acquisition. In that case, a capital gains tax liability will be due to them when the company is dissolved.
Companies that are solvent at the time of dissolution and those distributing profits to shareholders as capital gains or dividends will need to inform them that tax will apply to these distributions.
Additionally, directors and shareholders may also be subject to personal tax implications upon dissolution of a limited company, especially if they are receiving final salary payments or bonuses.
VAT-registered companies making taxable supplies, will be subject to VAT implications upon dissolution. These include the deregistration process and any outstanding VAT payments.
Finally, if the company has employees, payroll taxes and obligations will need to be addressed before closure. This includes finalising PAYE (Pay As You Earn) obligations.
What Is The Most Tax Efficient Way Of Closing Down A Limited Company?
The most efficient ways of closing down a solvent (one that can pay its debts) limited company is either of the following methods:
- Voluntary Strike Off; or
- Member’s Voluntary Liquidation
To qualify for a Voluntary Strike Off, the company should not have performed the following business actions in the previous three months:
- changed its name
- sold assets
- engaged in any business activity
In this case, striking off your limited company from the Companies Register includes the following steps:
- a board meeting is held to pass a formal resolution in writing to close the company
- directors sign the Voluntary Strike Off application
- employees and creditors are notified of the application
- application is then filed using a DSO1 form
Member’s Voluntary Liquidation is another tax-efficient way of closing a limited company. This requires the shareholders to appoint a liquidator who can manage the company’s liquidation process. In this case, shareholders will require the services of an Insolvency Practioner to manage the realisation of the company’s assets; including buildings, vehicles and cash.
Meanwhile, insolvent companies (ones that cannot pay their debts) can be closed in either of the following ways; depending on their circumstances:
- putting the company into administration
- getting the company struck off the Companies Register
- arranging voluntary liquidation by the creditors
In this case, too, one would need to seek the professional advice of an Insolvency Practioner.
The above discussion helps to conclude that if you are planning to close down a limited company, it is essential to follow the proper procedures and meet all legal obligations to avoid any potential penalties or legal issues related to tax evasion or improper dissolution. While tax liability cannot be completely avoided while closing a limited company, there are some tax-efficient ways that one can choose from.