Selling or closing your business: the basics

It is important that your tax and any official records concerning your business are up to date when you sell your business.

One of the major reasons for this is that the buyer's solicitors and accountants will have to carry out due diligence checks. This involves gathering information about all aspects of your business so that the buyer can:

• make an informed decision
• 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 details of any outstanding loans, with repayment schedules

You should also inform all your customers and suppliers so that:

• they have the chance to raise any outstanding payments, credits and liabilities
• you can account for any outstanding payments, credits and liabilities when you finalise your accounts and tax affairs

There are a number of steps to take and points to consider if you are stopping being self-employed.

Notifying HM Revenue & Customs (HMRC)

If you are stopping trading as self-employed you should write to your HMRC Tax Office to tell them that you have stopped trading or closed your business.

Finalising your Income Tax

You'll still need to complete your Self Assessment tax return for the tax year in which your self-employment ended.

For example, if you stopped trading on 15 May 2013, you will need to fill in a tax return for the tax years up to and including 2013-14.

Capital Gains Tax if you sell or dispose of assets

If you sell or dispose of business assets - for example buildings, equipment, fixtures and fittings, or even the business' reputation ('goodwill') - you may also need to pay Capital Gains Tax on the 'profit' (or gain) that you make.

You may be able to claim reliefs - particularly Entrepreneurs' Relief - that may reduce or postpone any gains. If you sell your own assets, you may have Capital Gains Tax to pay too.

You'll need to check whether you need to complete the capital gains pages on your tax return. In some cases you may need to complete these pages even if you don't make a profit.

Offsetting costs against your tax bill

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

Examples of close-down costs include:

• the cost of administration, postage and telephone charges to notify the relevant authorities - eg HMRC, institutions, suppliers and customers
• the cost of professional services from solicitors, accountants, estate agents, etc

Many of these costs may be allowable expenses, which can be offset against your tax bill.

Offsetting losses against your tax bill

If you were self-employed and you've made a loss, you may be able to offset this loss against your tax bill for the previous three years.

Stopping Class 2 National Insurance contributions

You must also tell HMRC when you stop being self-employed as this will affect your Class 2 National Insurance contributions. You can do this by calling HMRC's National Insurance Self-employed Helpline.

If you are stopping trading as a self-employed partner you should write to your HM Revenue & Customs (HMRC) Tax Office to tell them that you have stopped trading.

Finalising your Income Tax

You will still need to complete your Self Assessment tax return for the tax year in which you left the partnership.

For example, if you stopped trading on 15 May 2013, you will need to fill in a tax return for the tax years up to and including 2013-14.

Capital Gains Tax if you sell or dispose of assets

If you sell or dispose of business assets - for example buildings, equipment, fixtures and fittings, or even the business' reputation ('goodwill') - you may also need to pay Capital Gains Tax on the 'profit' (or gain) that you make.

You may be able to claim reliefs - particularly Entrepreneurs' Relief - that may reduce or postpone any gains. If you sell your own assets, you may have Capital Gains Tax to pay too.

You'll need to check whether you need to complete the capital gains pages on your tax return. In some cases you may need to complete these pages even if you don''t make a profit.

Stopping Class 2 National Insurance contributions

You must tell HMRC when you stop being a self-employed partner as this will affect your Class 2 National Insurance contributions. You can do this by calling HMRC's National Insurance Self-Employed Helpline.

If the partnership itself has ended, the nominated partner will need to complete the Self Assessment partnership return (form SA800) to cover the period up to the date it ended.

Offsetting costs against the partners' tax bills

There will be costs involved in the process of closing down a partnership.

Examples of costs when closing down a partnership:

• the cost of administration, postage and telephone charges to notify the relevant authorities - eg HM Revenue & Customs (HMRC), institutions, suppliers and customers
• the cost of professional services from solicitors, accountants, estate agents, etc

Many of these costs may be allowable expenses, which can be offset against the partners' individual tax bills.

Offsetting losses against the partnership's tax bill

If the partnership made a loss, you may be able to offset this loss against your tax bill for the previous three years.

If you are a subcontractor under CIS

If you are a subcontractor under the Construction Industry Scheme (CIS), you should tell HM Revenue & Customs (HMRC) as soon as possible if your subcontractor business ceases to trade.

If you are a contractor under CIS

If you stop trading as a contractor and are registered under CIS you may need to:

• complete the monthly CIS return for the month you stopped trading as a contractor
• pay over any CIS deductions that have been made from subcontractors' payments
• pay over any PAYE that's been deducted from employees' wages
• complete a tax return to cover the part of the tax year when you stopped trading

You should tell HMRC as soon as possible if your contractor business ceases to trade.

If the company or organisation is liable for Corporation Tax, it will still have to file Company Tax Returns and pay Corporation Tax during the closing or winding-up process when the company stops trading.

Some key tax considerations to be aware of are:

• the company may be able to claim certain expenses and reliefs associated with the costs of closing down
• any capital gains made when your company sells or disposes of its business assets should be accounted for through its Company Tax Return
• if your company or organisation has made a loss in its final accounting period, the company may be able to carry it back to set against its total profits over the previous three years

Capital Gains or losses you make personally

If you make personal gains or losses on the disposal of your shares or interest in the company or organisation you will need to declare these on the Capital Gains Tax summary pages of the Self Assessment tax return.

However, you may be able to claim Income Tax relief if your shares have become worth next to nothing.

If you are selling a registered company or a limited liability partnership (LLP) and this results in changes to the company's secretary or directors or the LLP's members, you must inform Companies House. You may find WebFiling from the Companies House website a useful resource.

WebFiling is a safe and reliable way for you to file company information online. As well as saving money on your annual return, WebFiling allows you to file most company information free of charge.

If you're selling your business, any employees will transfer to the new employer. You have a legal duty to inform and consult your employees under the business transfer legislation.

If you already have an information and consultation (I&C) agreement with your employees, you might choose to use this forum to raise the issue of the business' sale. However, with a business transfer, you only have to inform and consult with one set of employees - ie either those elected as representatives under your I&C agreement or those specified under business transfer legislation.

Employers' responsibilities when closing a business

If you have employees, you'll have certain legal responsibilities to meet when closing your business.

Making redundancies

If you close your business, you will have to make your employees redundant. Depending on how many employees you have and how long you have employed them for, you will have to:

• make statutory redundancy payments
• inform employees individually - and, if relevant, speak to their representatives
• follow a fair redundancy procedure

Jobcentre Plus may also be able to provide support and advice for you and your employees on redundancy. The Rapid Response Service (RRS) is delivered by Jobcentre Plus, skills bodies, development agencies and local authorities. RRS aims to deliver support to those who are vulnerable to - or affected by - redundancy.

Payroll issues

You must let HM Revenue & Customs (HMRC) know as soon as possible if you have stopped trading. You must also complete end-of-year returns up to the date you ceased trading. You will also need to pay any outstanding PAYE tax and National Insurance deductions within set deadlines.

Pension schemes

You must inform and consult employees about significant changes to their pension arrangements if you:

• employ 50 or more staff
• offer an occupational pension scheme or contribute to employees' personal pension schemes

Such changes include terminating the occupational scheme or ending your contributions to personal schemes - either of which could happen if you are closing your business.

If you are VAT-registered and you are closing your business, you will need to inform HM Revenue & Customs (HMRC). Once they are satisfied that your registration should be cancelled, they will confirm the date and issue a final VAT Return. When filling in the final return, you must account for VAT on stock and certain assets you have at the close of business on the day your registration is cancelled.

VAT when selling your business

If you are selling your VAT-registered business, you normally have to cancel your VAT registration.

However, in some situations, the new owner of your business can apply to keep your VAT registration number.

Reclaiming VAT after you deregister

Once you have cancelled your VAT registration, there are some limited circumstances in which you can reclaim VAT paid on your purchases. HMRC have information on what you can claim and how you can reclaim any VAT you are owed.

Read our guide Value and market your business for sale.