Closing a limited company in the UK can be a complex process, and one of the biggest areas directors worry about is tax. Whether the company is solvent and you are choosing to close it, or it is insolvent and needs to go through liquidation, HMRC will always need final information and payments before the business can legally cease trading. Understanding what taxes may apply helps directors prepare properly and ensures a smooth closure without risk of penalties.
The taxes you pay when closing a limited company depend on the method of closure, the company’s financial position and whether there are remaining assets. This article explains the key tax considerations, the final obligations to HMRC and how the process differs between solvent and insolvent closures.
Final corporation tax responsibilities
Regardless of how the company closes, it must settle its corporation tax obligations. This includes:
Final corporation tax return
The company must submit a final corporation tax return covering the period up to the date it stopped trading. This will include calculations for:
- Trading profits
- Chargeable gains on assets
- Allowable expenses
- Capital allowances
HMRC will expect this return even if the company has made no profit.
Corporation tax payment
If any corporation tax is due, the company must pay it before closure. If the business is insolvent and entering liquidation, the Insolvency Practitioner will include HMRC as an unsecured creditor.
VAT responsibilities when closing a company
If the limited company is VAT registered, HMRC requires specific steps before it can be closed.
Final VAT return
A final VAT return must be submitted, covering sales, purchases and VAT on stock or assets. Any VAT due must be paid. If the company goes into liquidation, VAT becomes part of the creditor claims.
VAT on assets
If you transfer or sell company assets, you may need to account for VAT. This includes:
- Equipment
- Vehicles
- Stock
- Tools
If the assets are sold as part of a transfer of a going concern, VAT rules may differ. Your Insolvency Practitioner or accountant can advise on the correct treatment.
PAYE and employment taxes
If your company employs staff, including directors who take a salary, HMRC will require:
- Final payroll submissions
- Payment of any PAYE, National Insurance and student loan deductions
- Submission of a final Employer Payment Summary
If any PAYE liabilities remain unpaid, HMRC will treat them as creditor claims in an insolvent liquidation.
Closing a solvent company and tax implications
If the company is solvent and you choose to close it because it is no longer needed, retirement is approaching or it has fulfilled its purpose, you may choose a Members’ Voluntary Liquidation (MVL). This is a popular method because it allows shareholders to extract remaining funds tax efficiently.
Income tax vs capital gains tax
When a solvent company closes, the money distributed to shareholders can be taxed as:
- Income
- Capital gains
In an MVL, distributions are normally treated as capital gains, which is often far more tax efficient than being taxed as income.
Capital Gains Tax (CGT)
When assets or reserves are distributed to shareholders, they may be liable for CGT. However, the tax rate is usually lower than income tax. Directors should calculate potential gains, deduct allowable losses and apply their annual CGT allowance.
Business Asset Disposal Relief
Formerly known as Entrepreneurs’ Relief, Business Asset Disposal Relief (BADR) allows qualifying shareholders to pay a reduced CGT rate of 10 percent. To qualify, conditions include:
- Owning shares for at least two years
- Being an officer or employee of the company
- The company being trading or recently ceased trading
Many directors closing a solvent company choose an MVL specifically to take advantage of this relief.
Closing an insolvent company and tax impact
If the company cannot pay its debts and must be liquidated through a Creditors’ Voluntary Liquidation (CVL) or Compulsory Liquidation, tax works differently.
HMRC as a creditor
Unpaid corporation tax, VAT, PAYE and penalties become creditor claims. HMRC is a secondary preferential creditor for certain taxes, such as:
- VAT
- PAYE
- Employee National Insurance
This means HMRC ranks above unsecured creditors but still below fixed-charge secured creditors.
Director’s personal liability
In most cases, directors are not personally liable for the company’s tax debts. However, HMRC may pursue directors personally in cases involving:
- Fraudulent trading
- Deliberate tax evasion
- Misuse of PAYE or VAT
- Repeated non payment of taxes
An Insolvency Practitioner will assess director conduct as part of the liquidation process.
Tax on distributions during liquidation
In both solvent and insolvent liquidations, the liquidator handles the distribution of assets. Tax treatment depends on:
- Whether the company is solvent or insolvent
- Whether distributions are income or capital
- Whether assets are sold or transferred
- Whether the company qualifies for BADR
In an MVL, distributions are capital in nature. In a CVL, distributions are typically not taxable for shareholders, as there are no funds left for them once creditors have been paid.
Final steps with HMRC before closure
Before a company can be struck off or wound up, the following must be completed:
- Final accounts
- Final corporation tax return
- Final VAT return (if applicable)
- Final PAYE submissions
- Confirmation of ceased trading
- Settling tax liabilities where possible
HMRC must be notified that the company has stopped trading. If the closure is solvent and directors intend to apply for strike off instead of liquidation, all tax debts must be cleared before submitting a DS01 form.
How Simple Liquidation helps directors through the process
Tax obligations often feel daunting during company closure, particularly when financial pressure is already high. At Simple Liquidation, we help directors understand their responsibilities clearly so they can take the right steps with confidence.
Simple Liquidation was designed to provide directors like you with a quick and simple solution to liquidate a company. Our liquidators are authorised by the Insolvency Practitioners Association and the Institute of Chartered Accountants in England and Wales. Jamie Playford FABRP MIPA and Alex Dunton MABRP are Insolvency Practitioners licensed to act in the UK by the ICAEW, supported by a team of experienced professionals who guide you from start to finish.
Simple Liquidation is not an intermediary, broker or sales company. We are an experienced team of insolvency professionals with extensive knowledge in dealing with companies of all sizes. Directors benefit from direct access to qualified Insolvency Practitioners who provide tailored advice and ensure the process is completed smoothly and compliantly.
If you are unsure what taxes apply when closing your company or whether liquidation is the right route, we offer a free, no-obligation consultation to discuss your situation and the options available.