Closing your contractor company tax efficiently
There are a number of reasons why you may decide that you want to close down your company, and there are several different approaches you can take to make this happen. Choosing the most suitable option for your circumstances can potentially give you significant tax savings.
Keeping the company open
If you think you may want to open a new company in the future then this could be a more suitable route – just keep the existing one open. With this option there may be costs incurred to keep the non-trading company accounts going, but you could switch to an annual service with your accountant so that the fees are reduced (at Intouch this would be in the region of £400 plus VAT). If you prepare your own VAT returns (which would be nil, therefore easy) your accountant could simply do your year-end accounts. You could even prepare your own tax return – your accountant could give you general guidance to help you.
Closing and liquidating the company
If you’re sure you won’t want to use the company again in the future this option completely closes your company.
When assets are treated as a capital gain, when they are not and the effect of changes to ESC C16
Up to February 2012 it was possible to extract assets to be treated as a capital gain simply by applying to HMRC for permission to do so, under what was called ESC C16. Now, however, a new rule is in force which no longer requires an application to HMRC for permission, but the total amount which can be withdrawn is capped at £25,000.
If your company holds less than £25,000 – not much has changed, the process is quite straightforward and your Intouch accountant can handle it entirely. You can release assets to your shareholders and they will be taxed as a capital gain, not dividends.
If you company holds more than £25,000 – this has become a bit more complicated. If you have retained profits above £25,000 and you want to withdraw them all as capital then you need to apply for a formal liquidation, which will then incur additional professional fees. Whether or not this is a suitable option depends on:
- how much you now have left in the company
- the potential tax saving, including Entrepreneurs’ Relief
- the professional costs of the liquidation
Dividends are taxed at 25% in higher rates whereas a capital gain can be as low as 10%.
In the end, the most cost efficient way to close down your company is determined by weighing up the tax liability with the potential fees and other costs of each solution. If you are considering closing your company speak with your Intouch personal account for expert advice.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.