Q: I bought and took over a small business back in 2007, a limited company. Sales now are far less and so a lot less admin is needed. Is it possible to change a limited company to sole trader?
Dec 15 2011
Answered by: Clive Lewis Ask a question
A limited company can cease trading at any time but as it has a separate legal entity it has to be removed from (or 'struck off') the Register of Companies. Before that can happen, financial reports up to the date of cessation must be prepared and filed and any outstanding Corporation Tax paid. If there are any unrelieved corporation tax losses (losses accumulated not yet offset against taxable profits), these will be lost.
In addition, any remaining assets must be disposed of and liabilities must be paid. Assets can be 'sold back' to you. This includes items such as a website and email address. If the company is VAT registered you should check if it is possible for the registration to be transferred to the sole trader. As you purchased a business there may be some goodwill remaining which will have to be written off. Any PAYE scheme must be closed. After the final payments of tax and other liabilities, etc the bank account must be closed. It is possible to apply to HMRC that any distributions (usually the bank account balance) can be treated as a capital gain subject to capital gains tax instead of income tax. Generally there is a tax saving on this. However this can be complicated so you should talk to your accountant for the best advice. In any case, this can only be done when the company is closing down and not at any other time.
If the business is transferred to a sole trader you will need to notify the existence of the new business to various agencies such as HMRC. Arrangements to have insurances transferred to the sole trader business will also have to be made.
The payments on account regime for Income Tax for sole traders is particularly onerous in the first year or two of trading, so you will have to put by a percentage of income (approximately 20 per cent) to make the payments when they fall due.
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