Many workers who offer their services through an intermediary, such as a personal service company may find that their company is no longer needed when a contract ends.

This may also be because they might fall within the off payroll working rules. This means that because tax and national insurance is deducted from payments that are made to the intermediary, the tax advantages that come with operating through a personal service company will be lost. It may also be because the end client finds the hassle of operating off-payroll working rules too much. This means that they will put workers using the intermediary company onto their own payroll.

The next thing to consider is what the best way to close down the company is, and how any remaining cash can be collected.

What is striking off?

When a company has less than £25,000 left in the company to extract, and can afford to pay its debts, striking off can be a good way to close down the business.

If this route is chosen, sums paid out will be treated as capital, rather than a dividend, meaning that the capital gains tax annual exempt amount can be used to reduce the taxable amount. Entrepreneurs’ Relief also means that any taxable gain is taxed at just 10%. The company must be struck off within two years of the last capital distribution.

If the dividend allowance and/or the personal allowance is available, or the distribution would be taxed at the lower dividend rate of 7.5%, striking off can still be used. Then it’s better if the extraction is considered to be a dividend, rather than capital. As such, it would be wise to breach one of the conditions so the extraction will be considered a dividend. For example, not striking off until two years has passed since the last distribution.

What is the Members’ voluntary liquidation (MVL)?

If the funds left to extract are over £25,000, and it would be best to have them taxed as capital, such as to benefit from entrepreneurs’ relief, or make use of an unused annual exempt amount, MVL can be used.

This is a formal procedure, directors must provide an affidavit that creditors will be paid in full, and a liquidator must be appointed.

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Any questions?

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