The ongoing lockdown may be the catalyst for many limited company owners to change their business model in order to survive or to create a simpler way of working. One option is to disincorporate – in other words, dissolve the limited company and, if the business is still viable, operate as a sole trader instead.
Why dissolve a limited company and operate as a sole trader
If you disincorporate (dissolve) your limited company and decide to operate as a sole trader you remove many of the legal and financial complexities and therefore, the burden on you and it could be cost effective too.
If your company:
- Is struggling with the legal and tax requirements of running a business
- Has no land and buildings or land and buildings, which would generate a relatively small profit if sold
- Holds minimal goodwill
- Holds contracts with clients that do not require you to be a limited company to trade with them
then disincorporation could be a tax efficient proposition. Be aware, however, that there will be a one-off cost for this action made up of tax and professional fees.
Tax issues to consider when dissolving a limited company and setting up as a sole trader
Not all these considerations may be applicable to your situation or there may be others not discussed below, so always talk to your accountant ahead of making any decisions.
- Transfer of closing trading stock and/or chargeable assets – stock and assets can be transferred to the new sole trade business at market value, however, Capital Gains Tax may be chargeable.
- Capital allowances – It is possible to transfer plant and buildings in specie (as they are, without having to convert them into cash) but be aware that writing down allowances are not given on plant and machinery in the final accounting period of the business. This could impact your company’s final accounts.
- VAT – A sole trader can elect to continue using the business’s existing VAT registration number.
As a rule, when trade ceases, all the goods held by the business are chargeable to VAT as they are transferred to new ownership. However, if you plan to continue the business as a sole trader, VAT may not be charged as it’s a ‘transfer of going concern’. The company may need to charge VAT on any land or buildings if it has previously made an election to waive their exemption to tax on these assets – speak to your accountant to find out if this will impact you.
- Stamp duty land tax -The sole trader may be liable for stamp duty if any company-owned land and buildings are transferred to him on disincorporation. This may be mitigated but speak to your accountant for guidance and be aware that there are different rules if the property is situated in Scotland or Wales.
- Intangible fixed assets – Tax may be chargeable on any transfer of copyright and customers lists. There is unlikely to be any taxable value for the transfer of goodwill unless this has been previously shown on the company’s balance sheet.
What is Dissolution?
If your company has ceased trading and you wish to close the business permanently then Dissolution could be an option for you.
Dissolution (Striking off)
If, for the past three months, the company has not engaged in any activity except for paying creditors, and the business name has not changed during this period, then you can dissolve your business.
All directors must sign a form that is sent to Companies House, copied to shareholders, creditors, and employees, along with a £10 fee paid by an individual, not the company.
If no objections are made, your company will be dissolved within 2 months of submitting this information. Any assets that are still held by the company at the point it is struck off will become the property of the crown. It is therefore important that all assets, including cash, have been transferred to the ownership of the shareholders before filing to dissolve the company.
There are other possible issues to address such as closing the PAYE scheme, and each company needs to be considered on an individual basis. HB Accountants are here to give you clear, transparent guidance and to help you make the best decision for your situation. For guidance or support, please contact Keith or Karen. We are working hard to help you.
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The information contained above is for general guidance purposes only. Whilst every effort has been made to ensure the contents are accurate, please note that each individual has different circumstances and it is essential that you seek appropriate professional advice before you act on any of the information contained herein. HB Accountants can accept no liability for any errors or omission or for any person acting on or refraining from acting on the information provided in the above