Many directors of solvent limited companies decide to wind down operations, for a wide range of reasons. For some, it’s to transition to a different role. For others, it’s to enter retirement. The common theme, however, is to settle on the most cost-effective option available.
The most cost-effective method of closing a company depends on your situation. For companies with high retained profits, a Members’ Voluntary Liquidation (MVL) could save you thousands in tax. It is the most tax-efficient method by far, with the higher cost of an MVL more than made up for by the saving in tax.. For companies without a large reserve of retained profits, striking off the company at Companies’ House is usually the most cost effective route.
In this article, we will be discussing this process, alongside how you should inform HMRC of your intent to strike off your company.
What is a company strike off?
A company strike off is the process of removing a company from the Companies’ House register. By striking your company off the register, it will effectively cease to exist. At the end of the process, your company will no longer be able to operate, sell its assets, or make any payments. Anything left in the company will transfer to the Crown once it fully closes, including assets or company accounts.
Once you have commenced the striking off process, a notice will be posted in the Gazette. This allows any third party, usually outstanding creditors, to object to the striking off of your company. Objections typically take the form of creditors demanding repayment, but can include other forms too. If no objections are made within three months, your company will be struck off.
There are several criteria you must meet before you can start the striking off process. These include:
- Your company must not have traded, sold assets, or changed its name, within the last three months.
- Your company must not have any agreements with outstanding creditors, such as a Creditors’ Voluntary Agreement (CVA). Similarly, no legal action must be currently taken against your company.
- Your company must be solvent. A solvent company has enough capital to cover its debts and liabilities within 12 months. If your company cannot do so, it is considered insolvent, and so cannot apply for a company strike off.
If your company meets these criteria, you will be able to file a DS01 form and begin the process of striking off your company voluntarily. However, there is another form of company strike off, which changes the process and its implications significantly. This is called a compulsory strike off.
What is a compulsory strike off?
Voluntary strike offs are the preferable type of company strike off, occurring when a company’s directors decide to wind down operations. However, there are scenarios that involve Companies’ House forcing a strike off. This is usually due to a company failing to provide company accounts, properly close down, or for other examples of non-compliance.
It is best to avoid a compulsory strike off, as the consequences for having it done to you are quite severe. In addition to your company closing, a compulsory strike off can result in an investigation into the conduct of both the company and its directors. Depending on the results of this investigation, the company directors can be disqualified for up to 15 years. Directors can also be barred from management roles in other companies. Additionally, company directors may be held liable for the repayment of company debts, putting their personal financial situation at risk. Company assets and accounts will also be transferred to the Crown, exacerbating the issue.
All in all, it is vital you do not allow your company to be forced into a compulsory strike off. If your debts are too much for you to manage, consider contacting a licensed insolvency practitioner for assistance. You may find that a Creditors’ Voluntary Liquidation is the solution to your problem.
Related: How to Negotiate a Time to Pay Arrangement with HMRC
The costs of striking off a company
Compared to other methods of closing a company, a strike off is cheap. You will pay a fee of £10 to submit a DS01 paper form, or £8 through the online portal. In addition to this, you will have other administrative costs, repayments, and taxes on your gains to factor into the overall cost of the process.
If your company has little in the way of retained profits, a strike off can be markedly cheaper than the leading alternative, an MVL. The cost of most MVLs starts at roughly £1,500, though the final cost depends on your situation. As such, it is best reserved for companies with retained profits in excess of £25,000, as this figure properly benefits from the reduced tax.
How to inform HMRC of a company strike off
If you plan to strike off your company, you must inform HMRC without exception. If you fail to notify HMRC, you risk your strike off being blocked. While this could merely delay the process, it could have wider-reaching consequences. For example, if you follow through with the closing of your company improperly, it could be placed into a compulsory strike off at a later date. As we mentioned earlier, the consequences of a compulsory strike off are significant.
Notifying HMRC is simple; you must send a letter informing HMRC of your intentions, in addition to a letter from the shareholders confirming the situation. You must also send HMRC your final annual accounts and tax return. If you have a payroll scheme, you should also ask for that to be closed. Finally, pay any outstanding tax liabilities to ensure all your obligations to HMRC are met. With all this done, you must only wait for your company to be struck off, and the process will be complete.
Also Read: What Should You Do If HMRC Contacts You About a Compliance Check?
When closing a company, a voluntary strike off can be the best and most cost-effective solution. However, there are scenarios when other methods are more appropriate.
At Clarke Bell, we have over 28 years of experience in helping companies find the best method of closing. Contact us today for a free consultation, and find out what we can do for you.