How to close a self-employment business in the UK

If for any reason you stop trading or leave a business partnership, you must inform the tax office. It's worth noting here that a self-employed person earning less than £1,000 per year does not need to be registered with HMRC at all.

How to deregister your business - step-by-step

Below we describe what to do to properly close your business. We have also included a lot of additional information that is worth reviewing.

Submitting your final self-assessment tax return

To do this correctly, you need to:

• Calculate your annual business income;
• Total your allowable business expenses (allowable expenses), bearing in mind that you can also include many costs associated with closing the business, such as administrative, postal, and telephone charges related to notifying relevant authorities - e.g., HMRC, institutions, suppliers, and customers, costs of professional services from lawyers, accountants, real estate agents, etc.;
• Calculate any capital allowances (capital allowances) along with any balancing charges that may have arisen from the sale of business equipment and machinery;
• Determine if you need to pay Capital Gains Tax (Capital gains tax – CGT) in connection with the sale or disposal of any business assets;
• Calculate your final profit or loss.

It is important to submit your final tax return by the deadline, as you may incur a penalty for late submission.

If the business being closed is a partnership, you need to determine which partner is responsible for submitting the return. However, before submitting the tax return, check if you can reduce your final tax bill. We have written about available reliefs later in this article.

Submitting the appropriate form is possible via Government Gateway.

Deregistering for VAT

If your company is registered for VAT, remember to cancel this registration.

Your final obligations if you employ staff

• Process your final payroll (PAYE), and deduct and pay any outstanding tax and National Insurance to HMRC within 17 days (or 14 if paying by cheque). Tick the box "Final submission because scheme ceased" (Final submission because the scheme has ceased);
• Enter the PAYE scheme cessation date in the „Date scheme ceased” field – remember, you must not enter a future date;
• Send your expenses and benefits returns (expenses and benefits returns);
• Record the leaving date in each employee's payroll records;
• Give employees their P45 on their last day of employment.‍

Deregistering from CIS

If you are a member of the Construction Industry Scheme (CIS), call the CIS helplineto inform them that you are no longer working in the industry.

Keeping company records

You must keep all documents related to your closed business for at least 6 years.

Allow HMRC to contact you for a year

Ensure HMRC has your correct address for 12 months after submitting your final tax return. If you need to move during this period, provide the authority with an alternative address.

How to reduce your final tax bill

You can:

• Claim Business Asset Disposal Relief (BADR; formerly Entrepreneurs' Relief) – you can find details on this in an article published on our sister portal Mamona;
• Claim overlap relief (overlap relief) – for example, if a company prepares accounts up to July 30th each year, and the owner decides to change the accounting date after starting the business, or ceases trading during the tax year, profits may overlap, leading to double taxation. You can find details on this in the HMRC guide;
• Claim terminal loss relief (terminal loss relief) – a loss incurred in the final tax year can be offset against profits from the previous 3 tax years.

More information on calculating taxable profits at this link.

In addition to the above, you should also check if you are entitled to any other Capital Gains Tax (CGT) reliefs you may be able to claim.

What to do if your self-employed business is in debt

Remember that as a self-employed person you are personally liable for any debts of your business, therefore your creditors can pursue you for their dues through legal action. So if your business is in debt, it's better not to bury your head in the sand and try to reach an out-of-court settlement. This can be done through a so-called Voluntary Individual Arrangement (Individual Voluntary Arrangements – IVA). It is an agreement under which you commit to regular payments until all or part of your debts are repaid. Payments are made to an insolvency practitioner, who then distributes the money among the creditors. IVA agreements are registered in the Individual Insolvency Register (Individual Insolvency Register) and removed from it 3 months after the agreement is completed.

What are the consequences if you don't immediately inform HMRC about closing your business

If HMRC is unaware that you have stopped trading, it will continue to send you self-assessment tax returns. Ignoring this can lead to financial consequences (approximately £1,600 in penalties if you are a year late), and furthermore, due to your failure to submit the return on time, the tax office may create an estimated tax bill (estimated tax bill). Estimated debts are legally enforceable. To cancel them, you must submit a correct self-assessment tax return within 3 years from the date the return was due. Missing this deadline will make the debts immediately due, and the estimated HMRC amount can no longer be changed.

If, for example, you ceased trading in June 2021 and did not inform HMRC, and additionally moved to a different address which you also failed to inform the tax office about, HMRC will demand that you submit a self-assessment tax return for the entire year 2021 and likely also for the tax year 2022. However, if you contact the tax office, submit the missing nil returns, and prove that the business effectively ceased trading after June 2020 and generated no further profits, there's a chance that after appealing to HMRC, you won't have to pay penalties. If, however, you continued to earn any income from the business, you will have to pay penalties along with statutory interest.

More information on closing a self-employment business can be found on this HMRC page.