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A Guide to Closing Your Limited Company

Limited Company

The expected off Payroll reforms which were due in April 2020 led to an increase in the number of contractors looking to close their companies down. Many decided that it was time to return to permanent employment, retire or even head for a fresh start overseas. At the last minute, the reform was delayed until April 2021, and we may well see the same effect again as the deadline approaches. In this article we'll look at the process for closing your limited company.  

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Closing a solvent limited company

The process for closing down a solvent Limited company depends on the level of reserves in the company and may or may not involve the use of an Insolvency Practitioner. You can find out more by reading our guide here.

But what happens if your limited company is no longer solvent?

The first half of 2020 has been difficult for contractors and despite all of your best efforts you may feel that your limited company has reached the end of its lifeline after exhausting all possible available support, such as additional finance via the  Coronavirus Bounce Back loan and the Job Retention Scheme. If you are in the unfortunate position that you cannot pay all of your liabilities and you do not want to incur further debt, you will need to understand the process of a Creditors Voluntary Liquidation (CVL)

CVL: what is it?

A Creditors’ Voluntary Liquidation is a formal insolvency procedure to wind-up your company -- on a voluntary basis, because you see no hope of recovery and there’s little in the way of profits.

To facilitate a tax-efficient exit from your Limited company you will need to work with your accountant and preferably a reputable licensed Insolvency Practitioner (IP).  Whilst you may be able to undertake the process yourself the rules will be alien to you and your time may be better spent on other things. An IP will realise your assets, distribute funds to your creditors and then seek to formally strike the business off the Companies House register.

CVL: Step-by- Step

How does a CVL work?

Here’s what should be done, and in the order they should be done:

  • Mutual decision – All directors will need to agree to put the business into liquidation following an accumulation of months of financial distress, leading to insolvency.
  • Notifying interested parties - Shareholders and creditors should be informed of your decision to liquidate the business. As well as preparing all the documentation that is required for CVL process, your IP will summarise assets, liabilities and outstanding debts to creditors
  • Setting liquidation in motion - If 70 per cent of shareholders agree to the liquidation, the process will begin. In terms of paperwork at this point, you will need to pass a ‘winding-up resolution.’
  • Liquidation in full swing  The process will be managed by your IP who will resolve creditor issues and realise assets to repay creditors. If you / the directors want to personally purchase company assets, such as computers or cars, this can be done so through the IP. However, these should be purchased at market value

A routine part of any CVL is an investigation into director misconduct to ensure that the activity leading up to this point was not unlawful. Under current rules, as a result of Covid 19, the “wrongful trading” rules have been relaxed meaning that as long as your actions and attempts to continue with the business were not  based on fraudulent or criminal activity you should not be found to have acted unlawfully.

An interview will take place with the director to investigate the above and financial records will be scrutinised, ensuring there are no undisclosed assets. Once the investigation has been satisfied with no red flags raised, the company will then be struck off the Companies House register.

Funding a Creditors’ Voluntary Liquidation

As a director of your own Limited Company, you will need to appoint a licensed IP to complete the CVL, and they will charge a fee for their services. Traditionally,  either the director pays the IP or the IP will value and realise the assets held by your business using the funds to repay creditors and cover their own fees.

Clearly if you are considering a CVL your company is in financial distress and this situation is currently further worsened by the Covid 19 pandemic.  It is not surprising then that some contractors are attracted by the offer of a “free” liquidation.

How does a so-called ‘free liquidation’ work?

In the process of liquidating a company, you as a director may be entitled to redundancy pay; you will also need to be classed as an employee, work a minimum of 16 hours per week and have a practical role rather than just an advisory role.

When a practitioner offers to liquidate your company for ‘free,’ they actually do so by using the redundancy pay-out to fund your company’s liquidation. In contrast, a licensed IP will charge you for their expertise and their fees will include processing your redundancy if appropriate. A licensed IP will not charge a fee or percentage of any redundancy claim you may be entitled to, you would receive the whole claim.

The following table sets out how the “free” liquidation may look when compared to a paid for service. The figures clearly show that the “free” claim leaves the director with less funds.

  “Free” CVL Service Paid for CVL Service
Liquidation fee – paid by director £0 £4,800 (inc VAT)
Director’s redundancy claim

£10,000

Processed by a 3rd party

£10,000

Processed by the liquidator

Referred company’s charge for assisting with the director’s redundancy claim £1,750 £0
Liquidator’s fee for placing the company into CVL £4,000 + VAT = £4,800  
Total amount director pays for liquidating their company £1,750+ £4,800 = £6,550 £4,800
Redundancy claim director receives after all the costs of the liquidation process £3,450 £5,200

If you believe that closing your company is the right thing to do, seek professional assistance to ensure that correct procedures are followed. Ideally you want to ensure your creditors are paid, your company closed properly and your taxes mitigated. If you are a client of Orange Genie Accountancy you can be sure your dedicated accountant can guide you through your company closure.

If you have any questions or if we can help in any way, please call our expert team on 01296 468 483 or email info@orangegenie.com

 

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