Understanding Company Strike Off and DS01 Form: A Comprehensive Guide

If you're a business owner considering closing down your company, you’re likely to come across the term "company strike off." This article delves into the company strike off process, specifically focusing on the DS01 form, and provide valuable insights on extracting remaining funds through Members' Voluntary Liquidation (MVL) and use of Business Asset Disposal Relief (BADR). Our aim is to make this guide professional yet easy to understand but you can always reach out if you have specific questions.

What is a Company Strike Off?

A company strike off is the formal process of removing a company's name from the Companies House register, effectively dissolving the company. This process is commonly used by business owners who have ceased trading and want to close their company in a straightforward manner. Once struck off, the company no longer legally exists.

The DS01 Form: Key to Striking Off Your Company

The DS01 form is the official document used to apply for a voluntary company strike off. Here's a step-by-step guide to completing and submitting the DS01 form:

1. Eligibility Check: Ensure your company meets the criteria for a voluntary strike off. Your company should not have traded or changed its name in the last three months, and it must not be facing any legal proceedings.
2. Form Completion: Download the DS01 form from the Companies House website. Fill in the necessary details, including your company name and registration number, and provide a director's signature. Please note that there is also an online version of the form that you can fill in and have the directors sign electronically.
3. Notify Interested Parties: Before submitting the form, notify all interested parties, including shareholders, creditors, employees, and HM Revenue and Customs (HMRC), of your intention to dissolve the company.
4. Submission: Send the completed DS01 form to Companies House along with the required fee. Once processed, a notice will be published in the Gazette, giving interested parties two months to object.

Pre-DS01 Checklist

Before submitting the DS01 form, it is essential to ensure that all your company’s financial and legal obligations are up to date. Here are the key steps you need to take:

1. Final Accounts Preparation: Prepare your company's final set of accounts. These should detail the company’s financial activities up to the cessation of trading.
2. File the CT600: Submit the final Corporation Tax return (CT600) to HMRC. This should cover the period up to the last day of trading, and you need to pay any outstanding Corporation Tax.
3. Confirmation Statements: Ensure that all confirmation statements are up to date. This includes any annual returns and updating any changes to the company’s details with Companies House.
4. Settling Debts and Liabilities: Clear all debts and liabilities. The company must be solvent and able to pay its debts within 12 months for a strike off to proceed.

Extracting Remaining Funds

When dissolving your company, handling the remaining funds properly is crucial. Here are the main options:

1. Distribution to Shareholders as income: Before submitting the DS01 form, distribute any remaining funds to shareholders as dividends. This distribution must be reported in your final accounts.
2. Distribution to Shareholders as capital: If the remaining funds once all debts are settled are less than £25,000 you can distribute those funds as capital rather than income. The benefit is that the taxation level in the hand of the shareholders is much lower if you do it this way. However, be careful that you cannot mix and match option 1 and 2. As a matter of fact, if you have paid a dividend recently, the HMRC might invalidate the capital distribution by deciding that the dividend should be aggregated with your strike-off funds.

Members' Voluntary Liquidation (MVL)

If the remaining funds are above £25,000 there is still an option to extract those as capital using a Member's Voluntary Liquidation (MVL). This formal liquidation process allows for an orderly distribution of assets and the treatment of proceeds as capital. Here’s how it works:

1. Declaration of Solvency: Directors must swear a declaration of solvency, stating that the company can pay its debts within 12 months.
2. Appoint a Liquidator: A licensed insolvency practitioner is appointed to oversee the liquidation process, ensuring assets are distributed fairly among shareholders.
3. Asset Distribution: The liquidator will realize the company’s assets and distribute the proceeds to shareholders.

Business Asset Disposal Relief (BADR)

As mentioned above, in case you extract the funds as capital, the shareholder will be charged capital gains tax rather than income tax. Not only is the tax rate for capital gains much lower than that of dividends but in some cases, you can even halve that rate. Previously known as Entrepreneurs' Relief, BADR provides tax relief on the disposal of qualifying business assets, reducing the Capital Gains Tax rate from 20% to 10% (there is a lifetime limit of £1m however). To qualify, you must:

1. Own at least 5% of the company’s shares and voting rights for at least two years.
2. Be an employee or office holder of the company.
3. Operate as a Trading Company: The company must be a trading company or the holding company of a trading group. For a company to be considered a trading company, it must conduct trading activities rather than investment activities. Here’s what this means:

• Trading Activities: Include activities like selling goods or services, manufacturing, providing professional services, and other activities that generate active income.
• Non-Trading (Investment) Activities: Include holding investments such as shares, properties, or other assets that generate passive income.

To qualify as a trading company for BADR, the company must not have substantial non-trading activities. The general rule of thumb is that non-trading activities should not exceed 20% of the company’s overall activities. This is assessed based on several factors, including:

1. Turnover: At least 80% of the company's income should come from trading activities.
2. Assets: At least 80% of the company's assets should be used for trading purposes.
3. Expenses: At least 80% of the company’s operational costs should be related to trading activities.
4. Management Time: At least 80% of management time should be spent on trading activities.

One should pay attention to that last point and ensure that you don't keep a business open once activity has ceased. Indeed, doing that would transform your trading business into an investment business (since the only activity left is holding cash from your past activity) which would in turn invalidate the BADR.

Linking MVL, BADR, and Fund Extraction

When you choose to dissolve your company through MVL, there are strategic advantages, especially when linked with BADR:

1. MVL for Structured Dissolution: By opting for MVL, you ensure a structured and orderly dissolution of your company, overseen by a licensed insolvency practitioner. This process involves liquidating assets and distributing the proceeds to shareholders.
2. Maximizing Tax Efficiency with BADR: During an MVL, if you qualify for BADR, you can significantly reduce the tax liability on the distributed funds. BADR lowers the Capital Gains Tax rate to 10%, making it a highly tax-efficient way to extract remaining funds.
3. Strategic Fund Extraction: Combining MVL and BADR allows you to extract funds in a tax-efficient manner. The insolvency practitioner will manage the liquidation of assets and ensure the proceeds are distributed to shareholders, who can then benefit from the reduced tax rate under BADR.

Conclusion

Closing a company is a significant decision that requires careful planning and consideration. By understanding the DS01 form process, the options for extracting remaining funds, and the benefits of MVL and BADR, you can ensure a smooth and tax-efficient closure of your business. For more detailed guidance on company strike off and related processes, don't hesitate to contact us.