Cease trading is the process of closing your business so that you no longer accept purchases from clients or customers. Your business will be struck off the Companies Register once you successfully close up your business. This article will guide you on what you need to know about cease trading a limited company or a sole trader
Cease Trading Limited Company
When a limited company ceases trading, all businesses will stop working. The company will have to register as dormant if there is a need for it again in the future. Its directors can wind up creditors to receive payment, let go of the employees, and remove the company from the register at the company’s house. At this point, it ceases to exist as a legal entity. Any assets are sold and the proceeds will be distributed accordingly.
Cease trading a limited company can vary depending on whether your company is solvent (meaning it can afford to pay off its debts) or insolvent (meaning it doesn’t have sufficient cash or assets to pay off its debts). If your business is solvent, you should be able to close the limited company and cease trading via a process called Members’ Voluntary Liquidation (MVL). Moreover, if your business is insolvent, you may be able to cease trading via a Creditors’ Voluntary Liquidation (CVL). In some cases, you may be able to close your business via dissolution or register it as a dormant company.
The best way to cease trading is to talk to an experienced insolvency practitioner. They’ll be able to provide detailed, personalized information about the most appropriate options for closing your limited company.
How to cease trading a limited company
Companies can cease trading for various reasons, which include a director’s retirement or ill health, ongoing financial problems, or simply because the company serves no further purpose. There are three ways a limited company can cease trading. They include:
- Creditors’ Voluntary Liquidation (CVL)
- Members’ Voluntary Liquidation (MVL)
- Company Dissolution
Cease Trading Through a Creditors’ Voluntary Liquidation (CVL)
A Creditors’ Voluntary Liquidation (CVL) is an insolvency procedure that is designed for insolvent businesses. In a CVL, the directors of an insolvent business voluntarily cease trading and “wind up” the business, using the value of the business’s assets to compensate creditors.
However, ceasing trading through a CVL is a common option for insolvent businesses that aren’t commercially viable, meaning they are unlikely to recover financially. A CVL often occurs after a long period of pressure and/or legal action from creditors to recover debts.
To close via a CVL, your business will need to be cash flow or balance sheet insolvent, meaning it can no longer afford to pay its creditors.
Ceasing Trading Via a Members’ Voluntary Liquidation (MVL)
A Members’ Voluntary Liquidation (MVL) is a legal process for closing down a solvent business. Unlike a CVL, the MVL process is for businesses that can successfully pay their creditors using existing assets and cash flow before ceasing trading.
However, If your business is solvent and you want to cease trading, the MVL process allows you to do so while extracting profits from the business. There are certain tax advantages to the MVL process, potentially making it a good option if your business has significant assets.
For example, cash distributed to shareholders through an MVL is subject to capital gains tax, rather than income tax. In certain cases, businesses closing via the MVL process may be eligible for entrepreneurs’ relief, lowering their capital gains tax rate. Entering an MVL is a complex process that requires an insolvency practitioner.
Cease Trading through Company Dissolution
Company dissolution is a legal process that allows you to close down a solvent business. The dissolution process is typically simpler than liquidation and may be the most effective option for your business if it’s financially solvent and has no debts.
However, your business needs to take several steps before it ceases trading through dissolution. For example, you will need to pay any outstanding taxes, pay employees in compliance with redundancy law, deregister the company’s payroll scheme and VAT, and close the company’s bank accounts. You’ll also need to make sure that any business assets are distributed amongst shareholders in advance, as ownership of company assets will pass to the Crown following dissolution. Dissolving a company has advantages and disadvantages, and may not be the best option for every business.
Cease Trading Sole Trader
Ceasing your trading as a sole trader can be so challenging to consider, but if, in any circumstance, you want to cease your trading, this article will guide you on what to do.
Firstly, you’ll need to consider a number of issues when ceasing your trading. This includes:
#1. Business records if you’re selling your business
It is important that your taxes and any official records concerning your business are up to date when you sell your business.
One of the major reasons for this is that the buyer’s solicitors and accountants will have to carry out due diligence checks. This involves gathering information about all aspects of your business so that the buyer can:
- Make an informed decision
- Modify the terms of the sale if necessary
Among other things, they will want to see:
- Profit-and-loss statements
- Tax returns
- Any relevant leases and details of any outstanding loans, with repayment schedules
You should also inform all your customers and suppliers so that:
- They have the chance to raise any outstanding payments, credits, and liabilities
- You can account for any outstanding payments, credits, and liabilities when you finalize your accounts and tax affairs
#2. Notifying HM Revenue & Customs (HMRC)
You should write to your HMRC Tax office, telling them that you have ceased trading. Afterward, you will have to complete a final tax return for income tax. However, you cannot normally do this until 5th April following the date you cease trading. You should also review the ‘payments on account’ you are due to pay. You may be able to ask them to change it now that you have ceased trading.
For VAT you will need to re-register within 30 days of ceasing to trade. You will also need to complete a final return and, make an arrangement to pay any VAT that you still owe.
#3. Business rates
You have to write to your local authority telling them that you have ceased trading. If you are no longer the tenant or the occupier of a property, you may not have to pay business rates. If the property is empty you may receive a discount on the rates, if you are still liable to pay.
#4. Business leases
If you trade from business premises, you will need to give your landlord notice to end the lease. Check your lease agreement to see when you are able to do this. If you are tied into your lease, you may need to speak to your landlord about selling or transferring (that is, assigning) the lease to someone else. If you are unable to do this then you could be held liable for rent, and possibly business rates, for the remaining term of the lease.
#5. Creditors
Write to any other creditors and tell them that you have ceased trading. Ask them for final invoices and statements. Also if there are people owing you business money contact them to arrange the payment.
#6. Staff
If you have employees, they may be entitled to wages, holiday pay, notice pay, and redundancy pay. This depends on how long they have worked for you.
#7. Business assets
Your business may have assets such as stock, vehicles, or equipment. Check if you can return some of your stock to the supplier to reduce the debt (this is known as retention of title). Consider holding a closing down sale or selling your stock to a competitor. You can also sell your stock online or at an auction. Use the money you raise to clear any priority debts first.
Cease Trading A Partnership
If you are a sole trader and want to cease trading a limited partnership. These are the things you need to do:
- Let HMRC know you plan to close your business and are no longer trading.
- Send your final self-assessment tax return before the deadline. You’ll need to detail income, expenses, capital allowance, any Capital Gains Tax, and final profit or loss. If you have an accountant, they can help you with this.
- The nominated partner must send a final partnership tax return in addition to their personal self-assessment tax return.
- Pay your final tax bill, including any tax, VAT, and National Insurance.
- Cancel your VAT registration if necessary.
If the partnership itself has ended, the nominated partner will need to complete the Self Assessment partnership return (form SA800) to cover the period up to the date it ended.
There will be costs involved in the process of closing down a partnership.
Examples of costs when closing down a partnership:
- The cost of administration, postage, and telephone charges to notify the relevant authorities – eg HM Revenue & Customs (HMRC), institutions, suppliers, and customers
- The cost of professional services from solicitors, accountants, estate agents, etc
Many of these costs may be allowable expenses, which can be offset against the partners’ individual tax bills.
If the partnership made a loss, you may be able to offset this loss against your tax bill for the previous three years.
Moreso, the sole trader who wants to cease trading must remember to keep business documents for seven years, such as bank statements, invoices, and receipts, and also the copies of employer’s liability insurance must for 40 years.
FAQs
Can a company just cease trading?
Companies can cease trading for various reasons including a director’s retirement or ill health, ongoing financial problems, or simply because the company serves no further purpose
How do you know if a company has ceased trading?
For sole traders, you can also visit GOV.UK and search the Individual Insolvency Register. Another place to look is the company’s own website to check whether it is still active. Have a look on the ‘About Us’ & ‘News’ pages to see if there are any announcements.
Is Cessation the same as liquidation?
Put simply, liquidation refers to the cessation of a company’s operations and the sale of its assets to pay outstanding debts to creditors. … Voluntary administration, on the other hand, presents a more flexible option for a company when they are insolvent or likely to become insolvent.
