The decision to close or sell a business can be a difficult one to make. Expert Legal Advice can help you with all your business queries – whether they regard selling your business or not.

If there is value left in the business, it may be worth trying to find a buyer. The decision to sell a business is usually prompted by a combination of factors in three broad areas:

• commercial changes
• financial pressures
• life changes

Sometimes, however, closing down is the only option. It can be forced by:

• a change in regulations
• an unfortunate series of events
• market forces
• hostile legal action

This guide will point out the tax implications of selling or closing your business. Other things you need to consider, such as your responsibilities towards employees, which are covered in other sections of this site.

Who you need to tell if you're selling your business

Your tax and any official records concerning your business will need to be up to date and complete when you sell your company.  You should also inform all your business contacts so they have the chance to raise any outstanding payments, credits and liabilities, and you can account for them when you finalise your accounts and tax affairs.

The buyer's solicitors and accountants will have to carry out due diligence checks, which involves gathering information about all aspects of a business so that the buyer can make an informed decision, and 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 outstanding loans, with repayment schedules.

You will need to follow the necessary statutory procedures and form filling to resolve any outstanding tax, VAT and National Insurance matters with HM Revenue & Customs. 

If you are selling a company and there will be changes to its secretary or directors, you must inform Companies House.  Read guidance on directors and secretaries on the Companies House website. You can also  find a list of relevant Companies House forms at the Companies House website.

Closing down a business

When you close your business, you will need to inform various people and organisations of your decision, and the timescales involved. Depending on the size and nature of the business, and your status -  eg sole trader, limited company, partnership -  this could involve quite a lot of planning and organisation.

To find out more about the necessary statutory procedures and form filling to resolve any outstanding tax and National Insurance contribution matters, contact HM Revenue & Customs. You can  find out about the statutory procedures for VAT when closing a business at the HM Revenue & Customs website.

If your business is a company or limited liability partnership, you'll need to inform Companies House that you are closing it down.

If you have employees, you  have obligations to safeguard their rights, finalise their pay and deductions, and issue their P45 form. You may also be able to offer them help in coping with the challenges arising from losing their job.

You may also have creditors, with a claim on any assets remaining in the business, and suppliers who need to be informed of your intentions. You will also need to inform your existing customers of the closure, collecting any outstanding payments due from them so you can finalise your accounts for tax purposes.

Preparing to close down a business

Closing down a business can be a difficult time but careful planning can help. Just as it helps to have a business plan when you are starting out, a formal written plan can prove invaluable as you bring your business to a close.

It may be useful to refer back to your original business plan to help make sure you include all aspects of your business in your closedown plan. You may even have specified procedures to follow for winding up the business in your formation documents.

Your plan should ideally list everything you need to do under headings, such as tax requirements, rentals and leases, and closing accounts with suppliers and customers. Set a specific date or timescale for each task.

Larger companies may have the financial expertise required during the closing down process among their workforce. However, you will almost certainly need to call on Expert Legal Advice as well as an accountant, and financial adviser. If there are assets to dispose of, you may need to use an estate agent, valuer, surveyor or auctioneer.

To make sure you pay the right amount of tax, you will need to collect any money you are owed, and pay all your outstanding bills. This includes your regular operating costs up until the point your business closes, including utility and telephone bills and  any payroll costs.  If you are registered for Value Added Tax (VAT) you will need to inform HM Revenue & Customs. 

Closing a business can be stressful. If there is more than one decision-maker involved, outside parties can help  bring an objective viewpoint to any disputes  which may arise over money issues.

Employer's responsibilities when closing down a business

If you have employees, you must safeguard their rights, finalise their pay and deductions, and issue their P45 form.

You will need to follow the standard employer's procedures. You need to inform HM Revenue & Customs that your business is closing and you do not expect to employ any one during the coming tax year. If you are a limited company HM Revenue & Customs will ask for additional information.

The position of an employee with regards to rights to redundancy pay, company pension payments etc, will vary according to the circumstances of the business closure (eg insolvency, voluntary liquidation) and the business type (eg partnership, limited company, sole trader).

Employees who lose their job as a result of your business closing may be entitled to certain National Insurance-related benefits. You may be able to help them make their claim, and provide documentation needed to back it up.

The cost of closing down

There will be certain essential costs involved in the process of closing down your business.

The cost of administration, postage and telephone charges to notify the relevant authorities (eg Companies House, HM Revenue & Customs, HM Revenue & Customs), institutions, suppliers and customers should be included in your preparation of the final accounts of the business. You should also take into account the cost of professional services from solicitors, accountants, etc.

Many of these costs may be allowable expenses, which can be offset against your tax bill. Your accountant and your tax office will be able to tell you whether you can do this in each case.

Tax and VAT issues when closing your business

When you close your business, HM Revenue & Customs will need to assess how much your final tax bill should be. It is essential to let HM Revenue & Customs know of any possible tax liabilities you have as soon as they are known, even if you are currently unable to pay the tax you owe.

If business assets are sold and the proceeds go to the individual owners, or if shares in the company are sold, the individuals concerned may have to pay Capital Gains Tax.

If you are VAT registered, you will need to inform HM Revenue & Customs. Once they are satisfied that your registration should be cancelled they will confirm the date and issue a final VAT return, on which you account for VAT on stock and certain assets on hand at the close of business on the day your registration is cancelled.

You can also find out more about winding up your business at the HM Revenue & Customs website.