Shutting down your limited company – cessation accounts

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.

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 the date the company actually stops trading. It may still receive payment from customers or settle outstanding bills afterwards, so the date of the final bank transaction isn’t necessarily the cessation date.

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 may 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.

The amount left in the company matters. If distributions made before an informal striking off exceed £25,000, they will generally be treated as income rather than capital. Where larger sums are involved, a Members’ Voluntary Liquidation (MVL) may be more tax-efficient.

There are also anti-phoenix rules to consider. If you receive a capital distribution and then carry on the same or a similar trade within two years, HMRC may treat the distribution as income where the other conditions of the anti-avoidance rules are met.

Submitting cessation accounts and final returns

Once the accounts have been finalised, your company will need to submit its final Company Tax Return to HMRC, together with the accounts and tax computations. Any outstanding Corporation Tax and other tax liabilities will also need to be paid.

Your company continues to have Companies House filing obligations until it is struck off the register. This includes filing accounts and confirmation statements when they fall due.

If you fail to comply with these obligations, as a director of the limited company, you may face penalties and, in some circumstances, 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 make sure 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 paid the company and all creditors have been paid.

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.

Any money or other assets still belonging to the company when it is dissolved will normally pass to the Crown as ‘bona vacantia’.

Ownership of these assets passes to the Crown and they are dealt with by the relevant bona vacantia authority.

You should therefore deal with the company’s remaining assets and close its bank account before submitting form DS01 (striking off) to Companies House.