What does a sole proprietorship have to consider when ceasing to trade?

Whether you are a sole trader or a company, there are tax and administrative steps to consider if you have decided to cease trading.

For example, if you are a sole proprietorship, you will need to file a tax return for the last trading period and provide HMRC with your return declaration that your business has ceased.

On the flip side, when you have a business, you need to consider filing an informal strike or voluntary liquidation of members with Companies House. Both options are discussed below so that you can find out which one applies to your business.

Sole proprietorship stops trading

All final income within the company would of course be taxed by you at a rate of 20, 40 or 45 percent as usual. If you have suffered a loss, you can carry that loss back. Since you cease trading, you can either carry the loss back to the previous year as usual and offset it against all other income, or you can consider offsetting the loss.

With loss compensation, you can carry back the loss for three years – but only against trading income and not for all income. You can use either or a mixture of the two when you stop trading. After you’ve applied your damages appropriately, you should check to see if a Class 2 or Class 4 Social Security reimbursement also applies.

After you cease your activity as a sole proprietorship, any sold assets that were associated with your sole proprietorship are usually exempted for the sale of business assets and taxed at a lower rate with a capital gains tax of 10 percent. Terms apply and typically the company must have used the assets for at least a year prior to sale and you must have run your business for at least two years.

Informal processing

This option would require the company to write to Companies House and request an informal liquidation. To qualify, the company must be solvent, have simple deals, have not changed their name, or have not done any business in the last three months. The company would also need to settle all debts prior to liquidation, close the company’s bank accounts, and transfer all assets to shareholders. This option is only beneficial if the company is small and has reserves under £ 25,000. This is because any distribution of £ 25,000 or less would be taxed as a capital gain and, if eligible for relief on the sale of business assets, would be taxed at the lower rate of 10 percent. Any amount beyond that is taxed as dividend income. There are a number of qualifying criteria in order to be eligible for facility sale of business assets, but some important ones are that you must have been an employee or officer of the company and hold at least 5 percent of the share capital for at least two years prior to the sale the company is in trade.

Members voluntary liquidation

In the event of voluntary liquidation of members, the company must be solvent and appoint a liquidator who will normally sell all assets, settle all debts and return excess cash to shareholders. Any distribution paid prior to the appointment of the liquidator will be treated as a dividend, and any distribution made after the appointment of the liquidator will be a capital distribution which may qualify for relief on the sale of business assets and is only taxed at 10 percent. The same conditions apply as listed under informal liquidation.

Corporate Income Tax – Terminal Loss

If a company has made a trading loss in the last 12 months of trading, the loss can be carried forward for up to three years from the date prior to the start of the last 12 month period. If the company’s final accounting period is from January 1, 2025 to December 31, 2025, the three year period for this loss relief is from January 1, 2022 to December 31, 2024. Terminal losses can only be carried back and used against previous trading losses. In addition, it is possible for the company to carry forward previous trading losses after April 1, 2017 in accordance with CTA 2010, Section 45, Sections 45A-45B. These losses can only be carried back for three years with restrictions including they cannot be carried forward to years prior to April 2017 or one year prior to the occurrence of the loss.

Other considerations

If the company has excess cash prior to liquidation, consideration should be given to applying to HMRC for approval that the company would continue to qualify as a trading company for the sale of business assets.

If you are a shareholder and neither you nor someone close to you was an employee of the company or an affiliated company, you can claim the investor’s discount instead of the sale facility. A profit from the investor relief would continue to be taxed at 10 percent.

Emma Twynholm is Tax Manager in the Tax Department at Hillier Hopkins

Continue reading

How to become a sole proprietor

Leave a Comment