Selling or closing your business a tax overview

The decision to close or sell a business can be a difficult one to make. 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. There are other things you need to consider, such as your responsibilities towards employees, which are covered in other sections of this site.

Tax Concerns When Selling Your Business

As soon as you begin to think about selling your business, you should also start thinking about the tax consequences of the sale.

After you sell your business, the amount of tax you owe will depend on the internal structure of your company and how you structure the sale. If you plan wisely you can minimize your tax liability.

Your tax advisor will determine what's best for your company. They'll also help you with the following tax issues that you'll confront when you sell your business.

Structuring the Sale

It's important to structure the sale so that you minimize the tax liability on the gain from the sale. For example, if you provide seller financing by accepting installment payments or shares of the purchaser's stock, you should structure the transaction so you don't pay tax on the gain until you receive all of the installment payments or shares of the stock. i.e. If the payments are just to defer payment upfront, the seller is liable for the complete tax bill on the value of the sale on the contract date. If the payments are linked to the performance of the business in the next years, then CGT can be defered until the end of this time, when the total gain can be accessed, and therefore taxed.

Remember that the rate at which you're taxed and the date depends on the date & character of the gain.

Structuring Your Company

If you operate as a sole proprietorship or a partnership, think about incorporating. If you incorporate your business, the corporation -- not the individual owners -- is responsible for tax liabilities and debts.

Sale of Stock vs. Sale of Assets

When you sell stock, gains or losses are generally treated as capital gains or losses. Some items -- goodwill, most real property gains and any appreciation over the original cost of equipment -- qualify as capital gains.

On the other hand, when you sell individual business assets, such as inventory or equipment, much of the gain is considered ordinary income. Gains from inventory, publicly traded securities and depreciation recapture are not eligible for installment reporting. And if you offer seller financing, you should know that if the total value of installment payments exceeds a fixed rate set by the taxing authorities in a year, interest is charged on deferred taxes.

Tax-deferred Reorganisation

If you don't want to sell out completely, you can combine forces with another business through a tax-deferred reorganization and avoid significant tax effects. There are a number of ways to restructure two separate organizations into one entity. According to the tax authorities, tax-deferred reorganisations must have continuity of ownership and continuity of the business. This continuity exists if at least half of the equity in the target company is acquired in exchange for stock of the acquiring company.

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 the taxing authorities and Customs and Excise.

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 the taxing authorities.You can find out about the statutory procedures for VAT when closing a business at the Customs and Excise 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. See our guide on making an employee redundant.

Use our interactive tool to get a checklist of how to handle potential redundancies.

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 outside specialist professional advisers such as your solicitor, 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 Customs and Excise. Find out about the statutory procedures for VAT when closing a business at the Customs and Excise website.

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 can download more information about these procedures in the day-to-day payroll guide from the taxing authorities website (PDF). You need to inform the taxing authorities 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 the taxing authorities 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. See our guide to making an employee redundant.

Use our interactive tool to get a checklist of how to handle potential redundancies.

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, taxing authorities, Customs and Excise), 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. You can find your local tax office through the taxing authorities website.

Tax and VAT issues when closing your business

When you close your business, the taxing authorities will need to assess how much your final tax bill should be. It is essential to let the Inland Revenue 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 Customs and Excise. 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. See our guide on how to cancel your VAT registration.

Use our interactive tool to investigate the tax and legal issues when selling or closing your business.

You can also find out more about winding up your business at the taxing authorities website.

Insolvency and bankruptcy

Bankruptcy is one route you can take if you have debts you cannot pay. It frees you from your debts, but your assets are divided among your creditors and restrictions are placed on your future business activities. If you become bankrupt through no fault of your own, these restrictions are generally lifted after 12 months.

A company may be forced to close by being taken to court by its creditors, lenders, shareholders, or by the government or legal authorities seeking to wind up the business.

Alternatively, the owners or directors of the business may decide not to continue operating the business and apply to have the business wound up.

If you decide to close your business, you may find it helpful to talk to an insolvency practitioner. Find an insolvency practitioner through the Insolvency Practitioners Association website.

The court may rule that the company is passed into the hands of the Official Receiver . The receiver runs the company in the best interests of creditors and shareholders until its "liquidation" - ie the sale of the company's assets. Any money raised is used to pay off the company's debts. See our guide on insolvency and bankruptcy.

Businesses in the following parts of the UK can find more information about insolvency from these websites:

England - the Insolvency Service website
Scotland - the Accountant in Bankruptcy website
Northern Northern Ireland - the DETI Insolvency Service website

You can also find guidelines on bankruptcy for businesses based in Scotland and Northern Northern Ireland on the taxing authorities website.

Tax and VAT issues when selling your business

You will need to follow the necessary statutory procedures to resolve any outstanding tax, VAT and National Insurance matters with the taxing authorities and Customs and Excise.

Capital Gains Tax

When you sell a business, you may have to pay Capital Gains Tax if you made a profit - referred to as a gain - from the sale of the assets. But, if you use the proceeds from the sale to buy another business, you might be able to defer the gain through business asset roll-over relief. For more information see our guide on Capital Gains Tax. You can also download the helpsheet on business asset roll-over relief from the taxing authorities website (PDF).

VAT

UK Tax Advise on Selling a Going Concern

If your company is registered for VAT, contact Customs and Excise and complete form VAT 7 to cancel your registration, or form VAT 68 to transfer your registration to the new owner. See our guide on how to cancel your VAT registration.