The tax implications of closing a bank account too early on cessation of trade - Go Figure Financial | Bookkeeping Services Manchester

olivia26264

5 hours ago

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Companies become dormant for several reasons and not necessarily because the company may close down sometime in the future. Usually this is because the company has stopped trading and the directors want to keep the name, hold assets or intellectual property, or keep the company in reserve for the future.

When a company ceases trading, many directors withdraw whatever monies remain in the bank account, not being mindful of any tax implications this action may have.

Impact of corporation tax

Depending on the type of bank account (current or deposit), interest may accrue on any balance if the account remains open. In this situation, HMRC expects to receive a tax return and payment of tax on any interest received. If the company has taxable income and fails to notify HMRC or file a return, penalties can be charged. Therefore, any remaining cash should be transferred to a non-interest-bearing account, so no taxable income accrues and dormant status is retained. HMRC will stop requesting corporation tax returns when advised that the company has ceased trading and has no tax liabilities (via a tick box on the tax return) unless HMRC issues a further notice to deliver one.

Companies House treats dormancy slightly differently; a company becomes dormant if it has had no ‘significant accounting transactions’ in the period (except for narrow exceptions such as payment of the Companies House filing fee). A dormant company must still file a confirmation statement and dormant accounts each year and keep its registered office and statutory records up to date. Failure to file attracts penalties and may lead to compulsory strike-off.

Withdrawing any monies remaining

Closing the bank account too early can leave nothing to pay final liabilities including tax and accountants’ fees. However, after paying such liabilities, any surplus cash can be withdrawn either via dividends or, if the company owes the director money, by

repaying the director's loan account (which is not taxable). However, as it is still a transaction, claiming dormant status will not be possible for that period.

However, having a credit balance in the bank account is not enough – to declare a dividend, profits must have been earned which have not been withdrawn. The company needs to set aside sufficient profits to cover the full dividend amount at the payment date. If such profits exist, the total dividend can be varied payment by payment, which can be tax efficient should a shareholder’s marginal tax rate change in any following year.

A dividend paid in any accounting period means the company is not dormant in that period and it will usually be required to file small company accounts, returning to dormant accounts if no other transactions take place.

Capital distribution

The only method by which any withdrawal can be treated as a capital distribution taxed under capital gains tax rates (18% or 24% for 2026/27) is by closing the company. Even so, treating a distribution as capital is only available if the total amount paid to all shareholders is less than £25,000 (tax relief may be available by claiming business asset disposal relief). Where the distributable amount exceeds this amount, the shareholders pay income tax at their marginal dividend tax rates after taking into account the dividend allowance and any personal allowance, if available.