Many businesses are currently in a period of transition. Working practices are in some ways unrecognisable from the way they were just a few months ago, and in the wake of the Covid-19 pandemic there are daily headlines about how businesses have suffered and are continuing to face uncertain futures. However, these tend to focus on traditional business models – high street names and bricks-and-mortar firms – but the fact is that one-person businesses, such as the limited company you choose to work under, have been hit equally hard.
Whatever your industry, you might always have found a limited company to be an efficient and cost-effective way of working – yet suddenly find yourself no longer in demand. If you are a contractor who is not working at all or is significantly short on work in the wake of coronavirus, then it may be beneficial to close your limited company and consider working under an umbrella company.
Here, we explain everything you need to know about the state of insolvency and the options available to you when closing down your limited company.
What is insolvency?
Insolvency is a financial state in which a company either has liabilities which outweigh its assets or cannot pay its bills when required. Many companies have found themselves either insolvent or at risk of being insolvent as a result of lockdown, and while a company does not have to be closed down when it is insolvent, the various methods of doing so mean that there is usually at least one which is a viable option.
What is the difference between insolvency and bankruptcy?
While effectively meaning the same thing, insolvency refers to a business whereas bankruptcy refers to an individual. If you work as an individual and manage yourself but operate through a limited company, this means that insolvency is still the relevant term.
What is the difference between insolvency and liquidation?
Insolvency is a financial state in which a business is unable to move forward, whereas liquidation is the process by which the company can be wound up as a result. There are various forms of liquidating your own limited company which are designed to make the process as smooth as possible and ensure that any funds which are rightfully yours are not lost.
What happens during the process of winding up a limited company?
When closing your limited company, there are a number of routes you can choose to take:
Creditors’ Voluntary Liquidation (CVL)
This is where your company is closed and its remaining assets are sold in order to try and repay any debts, before being struck off the register at Companies House. This is undertaken by a qualified insolvency practitioner who acts as the liquidator.
This is the process of completely removing the company from the register at Companies House. Once accounts have been filed, the company is de-listed for any relevant taxes and any remaining liabilities are paid. You can then transfer any remaining money to yourself as a capital gain of no more than £25,000.
This is where a company is closed for a period of time rather than altogether. It gives you fewer responsibilities while leaving the company open for you if you wish to return to it in future – and although annual accounts still need to be filed with Companies House, there will be no tax to pay if there has been no trading activity.
Members’ Voluntary Liquidation (MVL)
This is a common route for limited companies to take, but only if they are still solvent. As part of the process the company’s assets are sold and the profits distributed to shareholders, which makes it the most tax efficient way to get money from your solvent company.
What services does Dolan Accountancy offer limited companies facing insolvency?
At Dolan Accountancy we offer specialist insolvency services to limited company owners and will be glad to discuss your options with you. Contact our friendly team today by calling 01442 795 100. The services we offer are:
- Dissolution Service
A limited company can be struck off the record at Companies House relatively easily if its reserves total less than £25,000. The administration fee for this service is £300 + VAT.
For complete MVL of a limited company, we charge £1700 + VAT. The liquidators, who are a separate organisation, will then charge disbursements on top of this cost.
You should only close your company if you are not going to use a limited company to be involved in a similar trade or activity for two years. Otherwise, you may be in breach of the Targeted Anti-Avoidance Rule (TAAR).
What is the Targeted Anti-Avoidance Rule?
The Targeted Anti-Avoidance Rule (TAAR) was first introduced in April 2016 in order to prevent an increasingly common practice among contractors commonly known as ‘phoenixing’. This involves winding up a company in order to distribute the profits before setting up new companies immediately afterwards.
People who are found to be operating a limited company within a similar trade within two years of an MVL can be caught by the TAAR, which may undermine the tax benefits gained from the MVL in the first place.
Moving to an umbrella company
If you are looking to continue working in a similar way without the responsibilities and liabilities of a limited company then working through an umbrella company is an excellent option, and one which is proving increasingly popular among contractors. At Contractor Umbrella, our award-winning umbrella company which was voted Best Umbrella Company by Contractors UK, you’ll receive all the benefits of working in this way which include:
- The security of working for one company hassle-free as opposed to several
- A single employer through which you can work for multiple clients
- Being paid as an employee through the PAYE system
- Statutory maternity and paternity pay
- Statutory sick pay
- Pension scheme
- Holiday pay
Speak to us today about becoming an umbrella contractor. You can download our template for terminating a contract with an existing accountant here.