Tax Implications of Business Liquidation

It often takes a lot of thinking before a director chooses to close their company. Closing a company may not be as simple as you’d expect, as there are various monetary aspects to think about. In this blog, we’re helping you with understanding the tax implications of business liquidation.

Business closure and liquidation

The most common method of liquidation is a creditor’s voluntary liquidation, which is entered by choice by a company’s directors. It can be used by insolvent companies that are struggling financially. The director and company’s affairs will be assessed to ensure that they didn’t take actions that would inevitably result in the business failing.

Once the director has been assessed and no wrongdoing has been found, the business can be closed, and the outstanding debts can be written off. If wrongdoing is found, however, the debts will not be written off, and the director will be responsible for paying them back.

Another common method is a member’s voluntary liquidation. This type of liquidation can only be used by solvent companies that can afford to pay off their debts. Many directors use this method due to its tax benefits.

Unfortunately, compulsory liquidation is common. It occurs when a business is forced to close by unpaid creditors. This process is often drawn out, and the director has very little say over what happens. They will likely face increased scrutiny as they have failed to adhere to their director’s responsibilities.

Another method is a strike-off, but this can only be used by companies with no outstanding debts. Other criteria must be met for this to be an appropriate solution for your business.

What’s the most tax-efficient way to close my company?

If you’re closing your company, it’s a good idea to gather as much information and advice as you can. The two most cost-effective methods of company closure are a members’ voluntary liquidation and a strike-off or company dissolution.

Company dissolution

A strike-off costs just £33 and can be completed by the directors themselves using a DS01 form. Once the form has been completed, it should be sent to Companies House. They will advertise the company closure so that other companies can object. You cannot use a strike-off if you have debts or a bounce-back loan.

If you have debts, the creditors will object to the closure, and you will likely end up in a compulsory liquidation. The company will be removed from the Companies House register if you have no debts and no objections.

To use this method, you must meet the following criteria.

  • Be solvent – owe no debts
  • Have not traded for three months prior
  • Have not changed the company’s name in the last three months

business liquidation tax

Members’ Voluntary Liquidation (MVL)

A member’s voluntary liquidation costs more than a strike-off but is known as the most tax-efficient method. This process requires the appointment of a licensed insolvency practitioner, who will be responsible for realising the company’s assets and distributing them.

The tax benefits of using this method will usually outweigh the costs of your licensed insolvency practitioner. It’s a good idea to talk to a few specialists before you make a decision about your company closure. At 1st Business Rescue, we can provide you with professional, honest advice.

To use this method, you must meet the following criteria.

  • Be solvent
  • Be able to pay any liabilities back within 12 months
  • Have been trading for at least 24 months

How does tax work with a Members’ Voluntary Liquidation (MVL)?

Whether or not you can experience these tax benefits depends on how much money you have in retained profits. If you have over £25,000 in profit, then you should consider using this method. These funds are usually labelled as capital gains tax rather than as part of your income tax, which means they will be taxed differently.

The capital gains tax rate depends on the amount you sold business assets for. There are some instances where you may not need to pay capital gains tax, but it depends on your personal circumstances.

What is Business Asset Disposal Relief?

Business asset disposal relief was previously known as ‘Entrepreneurs Relief’. This process means that you’ll pay 10% tax on qualifying assets. There are various reasons why a person may be able to claim this relief. This works out better than paying dividend tax rates.

If you’re selling a company, then you must meet the following criteria.

  • Be a sole trader or business partner
  • Have owned the business for at least two years
  • You must also dispose of all assets within three years

Can I access Business Asset Disposal Relief?

Those who meet these criteria could be eligible to access this relief. Remember, you must have a solvent company.

  • You are an office holder of the company
  • You hold at least 5% of the voting rights and 5% share capital
  • You are within the £1 million threshold for your lifetime limit

How to choose the right liquidator

When choosing a liquidator, you must ensure they have the correct experience and skills. Make sure you look into reviews to get a better idea of their reputation. We recommend that you contact a few practitioners and that you are wary of choosing the cheapest options. Make sure that you get all proposed costs in writing.

These two methods of limited company closure will not work for everyone, so it’s vital that you access quality support before you make a decision on what’s right for you. We hope this blog has been helpful in understanding the tax implications of business liquidation.

At 1st Business Rescue, we are always on hand to provide confidential and expert advice. Contact us today to see how we can help you close your company in a tax-efficient manner.

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