Here’s a typical question…
“I bought and took over a small business back in 2010, which was a limited company. Turnover has diminished so a lot less admin is needed. Is it possible to change a limited company to sole trader?”
Here’s the answer!
Can I switch from being a limited company to sole trader?
1. Striking off a limited company from the Company Register
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.
2. Asset disposal and liability settlement
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.
3. Dealing with the VAT and PAYE
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.
4. Closing company bank account
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.
5. Notify HMRC and other parties
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.
Seeking advice makes this whole process easier!
Of course, this whole process can seem quite a daunting one, so it makes sense to seek professional advice if you can.
Omni Chartered Accountants are experts in all areas of small business accounting and taxation advice, and can offer free of charge advice to help you make the right decision and also offer a cost-effective solution to dealing with the stages that are required to make the transition from Limited Company to Sole Trader.
Call 01902 837408 today or request a free of charge call-back from our website for an initial consultation – alternatively, click here to contact us via our dedicated client contact form.