Disincorporation and Tax Considerations: What You Need to Know
For business owners considering closing down a limited company and continuing as a sole trader or partnership, understanding the tax implications is crucial. Unlike incorporation, where tax reliefs exist to ease the transition, disincorporation lacks similar benefits.
This article explains the tax implications of disincorporation, including capital distributions, anti-phoenixing rules, and VAT registration changes.
No Disincorporation Relief
Unlike incorporation relief (under TCGA 1992, s 162), which allows gains on business assets to be rolled over into company shares, there is no equivalent relief for disincorporation.
A temporary disincorporation relief introduced in April 2013 allowed businesses to transfer land, buildings, and goodwill at cost (avoiding capital gains tax (CGT) on the company). However, this relief:
- Had a low limit (£100,000 market value cap).
- Had limited uptake.
- Was abolished in March 2018.
Thus, businesses must carefully plan disincorporation to manage tax liabilities effectively.
How to Close a Company
If you have decided to disincorporate, the most common methods are:
1. Striking Off (Cheapest & Simplest)
If your company has not traded for three months, you can apply for voluntary striking off using Form DS01 at Companies House.
- Cost: £33 (online application).
- Tax Treatment:
- Amounts distributed to shareholders are treated as income distributions (dividends).
- If total assets distributed are £25,000 or less, they can be treated as capital distributions (subject to capital gains tax (CGT), potentially with Business Asset Disposal Relief (BADR) at 10%).
HMRC Guide on Company Strike Off
2. Member’s Voluntary Liquidation (MVL)
For companies with larger retained profits, an MVL is often preferred.
- Cost: Typically £3,000+ in professional fees.
- Tax Treatment:
- Distributions are automatically treated as capital, rather than income.
- Potential eligibility for Business Asset Disposal Relief (BADR) (10% CGT rate).
- May be subject to anti-phoenixing rules (discussed below).
Anti-Phoenixing Rules: Avoiding Tax Avoidance
HMRC has rules to prevent business owners from closing a company to avoid dividend tax and then restarting the same business under a new structure.
For an MVL to qualify for capital treatment, it must avoid the anti-phoenixing provisions under ITA 2007, s 396B.
Four Key Conditions for Anti-Phoenixing to Apply:
- The individual (S) owns at least 5% of the company.
- The company is a close company (controlled by five or fewer shareholders).
- Within two years of the distribution, S or a connected person:
- Continues to run a similar business (including as a sole trader or in another company).
- One of the main purposes of winding-up is to reduce income tax.
If These Conditions Are Met:
- Distributions will be treated as income (dividends), not capital.
- This means higher income tax rates (up to 39.35%) apply, rather than CGT rates (10%-20%).
🚨 HMRC does not provide clearance on anti-phoenixing rules, so business owners must self-assess.
Transfer of VAT Registration
A business moving from a limited company to a sole trader can transfer its VAT registration, but recent delays in processing have caused issues.
🔹 Options:
- Apply for a VAT Transfer – May take time due to HMRC processing delays.
- Deregister the company and register a new VAT number as a sole trader – This might be simpler and faster.
Final Thoughts: Is Disincorporation Right for You?
- For small businesses with less than £25,000 retained profit, striking off is the cheapest option.
- For larger businesses, an MVL may offer capital treatment but must avoid anti-phoenixing rules.
- Plan ahead for potential VAT transfer delays.
If you need guidance on closing your company while minimizing tax liability, Merranti Accounting can help. Contact us today for expert tax advice.
