As dental associates, for one reason or another, during your career you may have set up your own limited company to provide your services to a variety of clients. Setting up a limited company, particularly if you have only traded as an associate through it, is a relatively simple and painless exercise. If you no longer wished to trade through a company though, for example, you are coming up to retirement, you may find that coming out of a company is a bit more complicated than going in.
Before we get into the detail of how disincorporation works, there are a few bits of jargon it may help to clear up.
Solvent or Insolvent?
There are fundamentally two different situations in which a company may be wound up. A solvent liquidation is where the company can still pay its bills and could continue to keep trading but the directors/shareholders have expressed that they wish the company to cease.
An insolvent liquidation on the other hand, is where the company can no longer afford to pay its dues (think BHS) and is forced to close down by its creditors. An insolvent liquidation is much more formal and involves the appointment of an authorised insolvency practitioner.
In most circumstances involving a limited company, a solvent liquidation will be sought so this should not be perceived adversely in any way.
Strike off or liquidation?
In the case of a solvent liquidation, the company can either be struck off from the registrar of companies, or the members (shareholders) can start a voluntary liquidation. A company strike off is the easiest and most straightforward way to close down your company, but to be able to do so you will need to ensure your company meets the following criteria:
- It has paid all debts owed to creditors;
- It has not traded in the last three months. This means, in practice, if you are a dental associate running your own company, in the last three months you cannot have provided services to a practice through your company. (It is worth noting that the revenue does accept that the company will likely still need to pay expenses such as bank charges, and these will not reset the ‘non trading’ clock);
- It has not changed its name in the last three months;
- It is not under threat of liquidation, and;
- It has no agreements in place with any creditors.
Provided that these conditions have been met, we can then begin to look into how coming out of a limited company may impact your personal taxes.
Capital Gains Tax or Income Tax?
If on closing your company down, there are £25,000 or less of ‘retained profits’ (profits less corporation tax) remaining, the company can be closed and any profits left can be distributed to the shareholders as a capital distribution. This means you will pay capital gains tax on the cash received, which could be taxed as low as 10% if you meet certain conditions.
If the retained profits in the company are greater than £25,000, you can’t simply strike off the company and pay Capital Gains Tax as detailed above. Instead, the company will need to consider distributing excess reserves (usually as dividends, which shareholders will pay Income Tax on) in order to reduce to the £25,000 amount. At this point, the strike off and capital distribution can continue.
There are other ways to close a limited company with reserves greater than £25,000. The company can appoint an insolvency practitioner, even if not forced to by its creditors, and any distributions to shareholders after appointing the liquidator will be deemed capital.
This is ideal, as we mentioned above capital tax on distributions on winding up could be as low as 10%. Much lower than higher/additional rate tax on dividends (32.5% and 38.1% respectively). However, HMRC have cottoned on to this attractive option, and there are anti-avoidance clauses in place to prevent the ‘phoenixing’ of the dissolved company.
If a voluntary liquidation takes place, HMRC may withdraw the capital treatment of the distributions if the following apply:
- The company is a Close Company (five or fewer shareholders);
- Within two years of the liquidation, the owner is involved in the same trade in a new set up, and;
- The liquidation appears to have happened with the sole purpose of reducing tax.
If these apply, you could be facing a large unexpected Income Tax bill.
Aside from tax, there are a number of other commercial aspects that will need to be considered when closing your company. For example, if the company owns assets (e.g. a laptop), these will need to be disposed of (most likely to the directors) which could result in the company paying some additional tax. Anything not disposed of technically goes to The Crown, so if you don’t want Will and Kate getting their hands on your Apple Mac you will need to make sure they’re sold in the last set of accounts!
The company will also need to inform all relevant legal bodies, such as Companies House and HMRC of their intention to close, and file the required forms with both to formalise the process.
Clearly there are many different moving parts to the dissolution of a limited company and in order to meet all legal requirements in the most tax efficient way, the advice of a qualified professional is crucial. Here at Hive, our chartered accountants can guide you through this process, and with our network of professional contacts we can help with whatever is next for you, post company.