If you are a contractor and are no longer supplying your services through a limited company, you’ll need to take appropriate steps to close it. It’s important that this is handled properly to avoid penalties and any impact on your future credit rating or trading prospects.
Before we go on, we should say that the following are general recommendations and you should always follow the advice of your accountant in line with your particular circumstances and the financial position of your company.
Future intentions to trade through your limited company
Changes to the IR35 legislation in April 2021 prompted many private sector hirers to stop engaging limited company contractors altogether. This has left a large number of contractors shifting to direct PAYE or umbrella company working.
While this is the most current reason why contractors are turning away from their limited companies, there are other reasons too, such as taking up a permanent job offer or retirement.
When it comes to winding up your limited company, you should consider why you are ceasing trading, and if you may want to resume in the future. In case of the latter, you may choose to make your company dormant, rather than shut it down completely.
Making your company dormant
Making your limited company dormant is a way to keep it ticking over if you intend resuming trading in the future. While there is an overhead attached to maintaining a dormant company, you avoid the full expense of shutting it down, and re-incorporating if you want to start up again.
Without delving too deep into accountancy jargon, a dormant company is classed as having “no significant accounting transactions” during an accounting period. It also can’t be active or liable for corporation tax.
There isn’t a set time limit for keeping your company dormant, but if you are not planning to resume trading through it within a couple of years, you should consider shutting it down completely.
Closing your limited company
Once you have made the decision to close, it is important to ask yourself whether your limited company can pay its debts. If there isn’t sufficient funds within the company to pay its creditors in full, the process of closure becomes a lot more complicated. Your accountant is best-placed to advise you on this, and further support is available from the Insolvency Service.
Assuming your company can meet its financial obligations, it is then a relatively straightforward process to close it down.
Basic closure checklist
✔ Set a closure date
✔ Complete all outstanding transactions (eg. invoices) before this date
✔ Notify HMRC
✔ De-register for VAT and PAYE if appropriate
✔ Prepare final company accounts
✔ Calculate and pay corporation tax
✔ Empty and close company bank accounts
Three months after you cease trading, you can apply to have your limited company dissolved.
You do this by submitting a DS01 form to Companies House. They will advertise the proposed closure of your company for a period of consultation – usually around three months.
Assuming you are the sole director and shareholder with no creditors or employees, you simply need to inform HMRC, your accountant, your business bank and company insurer.
If you have a more complex trading history, or multiple directors or shareholders, there will be a longer list of who you have to tell – your accountant will be able to advise on this.
Providing there are no challenges or objections to the dissolution, your company will be removed from the Companies House register and will no longer exist. Once this is done you will no longer have the administrative costs of running the business, or the duties of being a company director.
Further information on closing your limited company is available from Companies House here or speak to your accountant.