How do I close or dissolve a limited company correctly?

At Towerstone Accountants we provide specialist limited company accountancy services for directors and owner managed businesses across the UK. We wrote this guide for people running a company who want clear answers on tax, payroll, Companies House filing duties, and day to day compliance without jargon. Our aim is to help you understand your responsibilities, reduce the risk of penalties, and know when to get professional support.

Introduction

Closing a limited company is something most business owners never plan for at the start, yet in my experience it is far more common than people realise. Sometimes the business has simply run its course, sometimes it never really got going, and sometimes circumstances change, such as retirement, health issues, or a move into employment. Whatever the reason, closing a company properly matters far more than many directors expect.

I regularly speak to directors who think they can just stop trading and walk away. Unfortunately it does not work like that. A limited company has ongoing legal and tax responsibilities until it is formally closed, and getting this wrong can lead to penalties, HMRC enquiries, or directors being pursued years later.

In this article, I am going to explain how to close or dissolve a limited company correctly in the UK, from deciding which route applies to your situation, through dealing with tax, payroll, VAT, and finally removing the company from the register at Companies House. I will explain this from a practical, real world point of view, based on how these closures actually work in practice.

By the end, you should feel confident about the steps involved, the common mistakes to avoid, and when you should seek professional advice.

Understanding the difference between closing and dissolving a company

One of the first points I always clarify with clients is that closing a company is not a single action. It is a process, and the correct process depends on the company’s financial position.

In simple terms:

• Closing a company means stopping trading and settling all outstanding matters
• Dissolving a company means removing it from the Companies House register

Dissolution is the final step, but you cannot dissolve a company until certain conditions are met. The route you take depends largely on whether the company is solvent or insolvent.

A solvent company can pay all its debts in full within a reasonable timeframe. An insolvent company cannot.

This distinction is crucial, because the process and legal obligations are very different.

When voluntary dissolution is appropriate

Voluntary dissolution is usually the simplest and cheapest way to close a limited company, but it is only available if specific conditions are met.

In my experience, this route is suitable where:

• The company has stopped trading
• It has no outstanding debts
• All taxes have been paid or can be paid before closure
• There are no legal disputes
• The company has not traded or changed its name in the last three months

If these conditions are not met, dissolution is not the right option, and attempting it anyway can cause serious problems.

Step one: stop trading properly

Before anything else, the company must stop trading. This sounds obvious, but it often causes confusion.

Stopping trading means:

• No longer issuing invoices
• No longer providing goods or services
• No longer advertising or seeking work
• Cancelling ongoing contracts where possible

You can still carry out administrative tasks during this period, such as collecting debts, paying bills, and closing accounts. These activities do not count as trading.

I always advise clients to clearly document the date trading ceased, as this date is important for final accounts and tax returns.

Step two: deal with outstanding company finances

Once trading has stopped, the next step is to tidy up the company’s finances. This is where most of the work sits.

You need to ensure:

• All customers have been invoiced
• All debts owed to the company are collected
• All suppliers are paid
• Any loans are repaid or written off correctly

If the company owes you money through a director’s loan account, this can usually be repaid before dissolution, provided the company has sufficient funds.

If you owe the company money, for example through an overdrawn director’s loan account, this must be repaid before dissolution. Leaving it outstanding can trigger tax charges and complications later.

Step three: final payroll and PAYE obligations

If the company has ever had employees, including directors on payroll, PAYE must be dealt with correctly.

This includes:

• Submitting a final Full Payment Submission
• Marking the payroll scheme as closed
• Paying any outstanding PAYE and National Insurance

Even if you only paid yourself a small director’s salary, these steps still apply.

I have seen companies delayed or blocked from dissolution because PAYE schemes were left open or final submissions were not filed.

Step four: dealing with VAT

If the company is VAT registered, deregistration is a key step.

You must notify HMRC that the company is no longer trading and request VAT deregistration. This triggers a final VAT return, which must include:

• All sales and purchases up to the cessation date
• Output VAT on any stock or assets retained, if applicable

Once the final VAT return is submitted and paid, the VAT registration can be closed.

This is an area where errors are common, particularly around assets and stock. If the company owns equipment or stock at deregistration, VAT may still be due even if nothing is sold.

Step five: prepare final statutory accounts

The company must prepare final accounts up to the date trading ceased.

These accounts are required for two main reasons:

• To calculate the final corporation tax position
• To support the company’s closure at Companies House

The final accounts should clearly show that trading has stopped and that assets and liabilities have been settled or distributed.

In practice, I strongly recommend that these accounts are prepared professionally. Errors here often lead to HMRC chasing directors after dissolution.

Step six: file the final corporation tax return

Alongside the final accounts, a final corporation tax return must be submitted to HMRC.

This return covers the period from the last accounting period end up to the cessation date. Any corporation tax due must be paid in full.

You also need to inform HMRC that this is the final return and that the company is closing.

Until HMRC acknowledges this and marks the record as closed, they may continue to issue notices and penalties.

Step seven: distributing remaining funds

Once all taxes and liabilities are settled, any remaining money in the company can be distributed to shareholders.

For companies using voluntary dissolution, there is an important tax point to understand.

If total distributions are £25,000 or less, they are usually treated as capital distributions rather than income. This can be more tax efficient, depending on your circumstances.

If distributions exceed £25,000, a formal liquidation may be required to achieve capital treatment.

This is a technical area, and I always recommend advice here, particularly where larger sums are involved.

Step eight: closing the company bank account

Once funds have been distributed and all payments made, the company bank account should be closed.

Leaving an account open after dissolution can create confusion and, in some cases, problems if unexpected transactions occur.

I advise clients to download and retain bank statements for their records before closing the account.

Step nine: applying for dissolution at Companies House

Once everything above is complete, you can apply to dissolve the company.

This is done by submitting form DS01 to Companies House. This can be filed online or by post.

By submitting this form, you are confirming that:

• The company meets the conditions for dissolution
• All interested parties have been informed
• The information provided is accurate

You must send a copy of the application to relevant parties, including shareholders and creditors.

Companies House will then publish a notice in the Gazette. If no objections are raised, the company will be struck off after approximately two months.

What happens once the company is dissolved

Once dissolved, the company legally ceases to exist. It cannot trade, own assets, or enter into contracts.

However, this does not mean you can throw away all records.

Directors must keep company records, including accounts and tax documents, for at least six years after dissolution. HMRC can still raise enquiries during this period.

When dissolution is not the right option

Voluntary dissolution is not suitable in all cases.

It is not appropriate if:

• The company has unpaid debts
• HMRC is owed money
• There are ongoing disputes
• The company is insolvent

In these situations, attempting to dissolve the company can lead to the application being blocked or reversed.

Closing an insolvent company

If a company cannot pay its debts, a different process applies.

Insolvent companies are usually closed through a formal insolvency procedure, such as a Creditors’ Voluntary Liquidation.

This process is handled by a licensed insolvency practitioner and is designed to protect creditors and directors.

Trying to dissolve an insolvent company instead of following the correct insolvency process can expose directors to personal liability.

Common mistakes I see when companies are closed

Based on my experience, the most common errors include:

• Not filing final accounts or tax returns
• Leaving PAYE or VAT schemes open
• Distributing money before settling taxes
• Ignoring overdrawn director’s loan accounts
• Applying for dissolution too early

These mistakes often result in HMRC objections or post dissolution enquiries.

How HMRC and Companies House interact

It is important to understand that Companies House and HMRC are separate bodies.

Closing a company at Companies House does not automatically close it with HMRC. Both must be dealt with properly.

HMRC will continue to expect returns and payments until they are formally notified and the company record is closed.

Can a dissolved company be reinstated

Yes, a dissolved company can be restored in certain circumstances.

This usually happens where:

• Outstanding debts come to light
• Legal action is required
• HMRC raises an objection

Restoration can be costly and time consuming, and it is something I always try to avoid by ensuring closure is done correctly the first time.

Final thoughts

Closing or dissolving a limited company is not just an administrative formality. It is a structured legal and tax process that needs to be handled carefully.

When done properly, voluntary dissolution is straightforward and cost effective. When done badly, it can lead to years of stress and unexpected tax bills.

In my professional opinion, the key is preparation. Stop trading cleanly, settle all liabilities, file final returns, and only then apply for dissolution.

If you are unsure which route applies to your company, or if there are complications such as VAT, payroll, or director’s loans, it is always worth taking advice before starting the process. Getting it right at the end is just as important as getting it right at the beginning.

You may also find our guidance on What happens to company assets when I close the business and What happens if I file my company accounts late helpful when exploring related limited company questions. For a broader overview of running and managing a company, you can visit our limited company hub.