Whether you are retiring, ready for your next challenge or your business has not been the financial success that you initially hoped it would be, there are a number of requirements that must be fulfilled in order to formally close a business.
In this guide, we explain the steps that must be taken to close a business, covering any tax, VAT, accounting, reporting and record-keeping responsibilities — as well as your responsibilities to various parties connected to the business, including staff, suppliers, clients and customers. This can then be used as a checklist, once that difficult decision has been reached.
How do you close a business?
The process to close a business can vary, depending on a number of different factors, including the structure and size of the business, as well as the number and employment status of any staff employed. There will be specific considerations, for example, around limited companies as compared with sole proprietors. There may also be longer and more complex procedures involved, with greater financial implications, if the business is large, employing high numbers of employees, as compared to an SME with a small team of agency workers.
Below we set out a checklist of the most important aspects of closing a limited company, although a number of these tasks will also apply to other types of business structure:
- Decide on an exit strategy
- Notify staff and consider redundancy payments
- Inform HMRC that the company has stopped employing people
- Close down the company’s payroll scheme
- Cancel any registration for VAT
- File statutory accounts and returns with HMRC
- Pay any outstanding tax liabilities to HMRC
- Pay all outstanding bills and settle any active accounts
- End all loans, leases and HP agreements
- Close the company bank accounts
- Apportion any assets among shareholders
- Apply to dissolve the company
This ‘how to close a business’ checklist is not exhaustive so, depending on the nature of your business and how it operates — including whether it remains solvent and is able to pay its bills, or has become insolvent — you may need to add, delete or re-order certain tasks. You will also need to account for both the costs and timescales involved for the completion of each task, as this checklist is not something that can be achieved overnight or without expense.
Exit strategies to close a business
To close a limited company, and before you can decide on an exit strategy, you will usually need to have the agreement of your company directors and shareholders. However, the way in which you close the company will depend on whether or not it can pay its bills.
If the company is solvent, you can either apply to get the company struck off the Register of Companies, also known as dissolving a company, or start a Members Voluntary Liquidation to wind the company up. When a company is insolvent, the interests of anyone whom the company owes money, known as the creditors, legally come before those of the directors or shareholders. In these circumstances, you must arrange the liquidation of your company. If you fail to pay your creditors, you may even be forced into compulsory liquidation.
Dissolving a company is usually much cheaper and quicker than liquidation, as this does not involve the appointment of an authorised insolvency practitioner to take control of the winding up process to close a business. Equally, once a liquidator is appointed, directors will no longer have control of the company or anything it owns, and cannot act for or on its behalf.
You can close down your company yourself by getting it struck off, but only if it meets certain criteria. The company cannot have traded or sold off any stock, or changed its name, in the last 3 months. It must also not be threatened with liquidation or have any agreements with creditors. If these criteria cannot be met, you will have to voluntarily liquidate instead.
If you would like to cease trading but still retain the company, with a view to starting up trading again in the future, you can let it become dormant. A company can remain dormant if it stops trading or carrying on any business activity, and does not receive any other income.
What employment rights arise when you close a business?
Before applying to strike off a limited company, you must close it down legally. This involves a number of things, including making sure that staff are treated fairly and lawfully.
You must consult with your staff as soon as a decision has been made to close a business, explaining the reasons for the closure.
By law, employees also have certain basic statutory rights, including the right to be given paid notice on termination of their employment or, in some cases, pay in lieu of notice. They may also have a right to a statutory or contractual redundancy payment.
Right to notice pay
When you close a business, unless you have suitable alternative employment at another location, you will need to dismiss your staff by reason of redundancy. By law, redundancy constitutes a fair reason for dismissal, but you must still follow a fair procedure, undertaking consultation where appropriate, and paying a minimum paid notice period or pay in lieu.
The statutory redundancy notice periods are:
- if employed between a month and 2 years, at least one weeks notice
- if employed between 2 and 12 years, one weeks notice for each year
- if employed for 12 years or more, 12 weeks notice.
You may give an employee more than the statutory minimum, but you cannot give them less. There are also special collective redundancy rules, with prescribed consultation periods in addition to any minimum notice period, if you have to make 20 or more redundancies at the same time. If the business is insolvent, employees may be able to claim statutory notice pay through the Insolvency Service, although this will be handled by the insolvency practitioner.
Right to redundancy pay
When making staff redundant, you may need to make redundancy payments. Absent any contractual scheme, an individual will be eligible for statutory redundancy pay if they are an ‘employee’ working under a contract of employment and they have worked for your business for 2 years or more. Where eligible, the employee will be entitled to:
- for each full year aged under 22, half a weeks pay
- for each full year aged 22 or older, but under 41, one weeks pay
- for each full year aged 41 or older, one and half weeks pay.
Length of service is capped at 20 years, with weekly pay capped at £571. This means that the maximum statutory redundancy pay someone can get is £17,130. If the business is insolvent, employees may again be able to claim redundancy payments through the Insolvency Service.
What must you tell HMRC when you close a business?
When you close a business, you will need to notify HMRC straight away that your company has stopped employing people. You will need to pay your employee’s final wages, including any outstanding tax and National Insurance contributions through PAYE, and give them a P45 on their last day. Once you have submitted your final payroll reports to HMRC, including your expenses and benefits returns, you can then close your payroll scheme.
If you are registered for VAT because you make taxable supplies in the UK, you must also inform HMRC that you want to cancel your registration. You can de-register for VAT online or by post, although you should carry on charging and accounting for VAT until HMRC confirms that your registration has been cancelled. The date of de-registration is usually the date you stopped trading and ceased making taxable supplies.
What accounts and returns must be filed when you close a business?
You must prepare and send final statutory accounts and a Company Tax Return to HMRC when you close a business, making it clear that these are final trading accounts and that the company is due to be dissolved. You do not have to file final accounts with Companies House.
If you have made a loss in your last year of trading, you may be able to offset the tax payable to HMRC against profits from previous years in your final tax return. This is known as ‘terminal loss relief’. You may also be to claim ‘business asset disposal relief’ on any Capital Gains Tax (CGT) payable on assets that you take out of the company before being dissolved. You will need to work this relief out on your personal self-assessment tax return, although if the amount in question is worth more than £25,000, it will be treated by HMRC as income rather than a capital gain, and therefore liable to Income Tax instead of CGT.
If you decide to let your company become dormant, you will need to notify HMRC in writing that the company has stopped trading and has no other income, and is dormant for tax purposes. You must complete a Company Tax return for the tax accounting period prior to the company becoming dormant and pay any outstanding Corporation Tax. The company will then usually have no further obligations to HMRC, although annual accounts and a confirmation statement will still need to be filed with Companies House for a dormant company.
What accounts must be settled when you close a business?
Before closing a limited company, or declaring the company dormant, all outstanding accounts must be settled and closed. This includes terminating all accounts with suppliers and service providers, including utility companies and insurers, as well as terminating and paying the balance of any loans, leases and HP agreements. This is in addition to paying any Corporation Tax and other outstanding tax liabilities, such as VAT — plus shareholders dividends, directors salaries, employees final salary and wages, and any pay in lieu and redundancy payments.
If the business is owed money by clients or customers, arrangements should be made for these accounts to be settled and finalised before the company’s bank accounts are closed. Before an application is made to have the company struck off, you should also make sure that any business assets are shared amongst the shareholders, for example, by closing any bank accounts, otherwise any remaining assets will pass to the Crown on dissolution.
You must keep records of your business, including bank statements, invoices and receipts, for 7 years after a company is struck off. You must also keep copies of your employers’ liability insurance policy and schedule for 40 years from the date that the company was dissolved.
What is the process to close a business as a sole proprietor?
When you close your business as a sole proprietor, you will still have many of the same responsibilities as any other legal entity, including discharging outstanding tax liabilities, cancelling any VAT registration and complying with your legal obligations to employees.
How to close a business FAQs
How do I close down my own business?
To close down your own business, provided its solvent and meets all the other criteria, you can apply to Companies House to have it struck off the register and dissolved.
Can I just close my business?
Before closing a business, you must notify various parties and follow certain procedural steps, especially when it comes to your legal obligations to your employees and HMRC.
What do I need to do when I close my business?
There are various steps that must be taken before closing a business, including notifying employees that they will be made redundant, reporting to HMRC and paying outstanding bills.
How do I tell HMRC that a company is closed?
You must inform HMRC as soon as a company stops employing people and close your payroll scheme. You must also send HMRC a final Company Tax return and statutory accounts.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert professional advice should be sought.