There may come a time when you decide that you no longer need your limited company. Here, a leading accountant explains the procedures you must follow when shutting down your business.
Cessation accounts are your company’s final accounts, used to calculate what is owed to HMRC and what you can safely extract before closing the business. Getting the timing wrong or withdrawing funds incorrectly can lead to unexpected tax charges or even loss of funds.
What are cessation accounts?
Daniel Mepham, Director of SG Accounting, told us:
The main reasons why our clients want to shut down a company are moving into permanent employment, retiring, or relocating abroad.
Whatever the reason, there are procedures that you must follow when shutting down your business, including submitting accounts to HMRC. Slipping up here can prove very costly!
Cessation accounts explained
Cessation accounts are the final set of accounts that you or your accountant will prepare. They cover the period from when you started trading, or from when your last set of accounts was prepared, to the date of cessation.
The cessation date is not when you decide to close the company. Instead, it is based on the date the trade ceased, which, for contractors, is typically the date your last invoice was paid or your last expense was incurred.
It is possible that the company will continue to collect money from debtors or pay out money to creditors after it has ceased trading. The cessation accounts make allowances for this, as well as any fixed assets the company may have.
Why are cessation accounts needed?
Cessation accounts have two main uses: firstly, they are used to calculate the final amounts owed by your company.
For contractors, this mainly includes final Corporation Tax, PAYE and VAT owed to HMRC.
Secondly, cessation accounts help determine how much money you can withdraw from the business.
Before the cessation accounts can be finalised, all outstanding liabilities must be identified and accounted for.
If you’ve been organised and have been paying your PAYE and VAT liabilities on time, then the only thing left to pay will be the Corporation Tax due on the profits made from your last trading period.
What you do with the remaining profit needs careful planning with your accountant.
There are several options (typically salary, dividends, and capital distributions), but there are also pitfalls to avoid. See our guide to paying yourself from a limited company for more details.
For example, if you take a capital distribution, you should not continue the same trade through a new company within 2 years; otherwise, HMRC may treat it as income rather than capital.
Submitting cessation accounts and final returns
Once the accounts have been finalised, you will need to provide a copy to HMRC. These will be used to prepare your final tax calculation and your CT600 Corporation Tax return, which must be submitted to HMRC.
Until you ask for your limited company to be voluntarily struck off from the official register, you must continue to provide statutory accounts and other returns each year to Companies House.
If you fail to comply with this, as a director of the limited company, you may face penalties and even prosecution.
Steps to take following cessation
It’s likely that some money may still be held in the company’s bank account.
Tempting as it may be to withdraw it all in one go, it’s important to ensure there are sufficient funds left to settle final liabilities first.
Next, you should think about closing the company’s bank account. This should only be done once you’re satisfied that all debtors have been refunded and that all creditors have paid you what is owed.
This is important because once the company is dissolved, you won’t be able to open another bank account in the company’s name to receive payments.
Plus, if you dissolve the company with money remaining in the account, the account and the money held within it will be classed as ‘Bona Vacantia’, or unowned goods.
In the end, ownership of the money passes onto the Crown and comes under the control of the Treasury Solicitor.
Therefore, to prevent your money from going to the Treasury, you should withdraw the final funds before submitting form DS01 (striking off) to Companies House.
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