A contractor company eventually ends. Either the contractor moves to permanent employment, retires, sells the company, or simply pauses contracting for a sustained period. Each route has its own tax-engineering decision. The MVL (Members' Voluntary Liquidation) route is the tax-most-efficient for closing a profitable company because distributions during the MVL are taxed as capital (CGT rates) rather than income (dividend rates). The TAAR rule constrains returning to contracting in similar trade within 2 years after an MVL. Dormancy is a low-cost option for "bench time" between contracts. Strike-off (DS01) is the cheapest route for a company with minimal assets. And selling the contracting business, increasingly possible for established niche specialists with goodwill and contracts, adds another option.
TAAR Catches Early Returners
The Targeted Anti-Avoidance Rule (TAAR) re-classifies MVL distributions as income (rather than capital) where the same individual returns to similar trade within 2 years of the MVL. The rule was specifically designed to stop contractors using MVL repeatedly. Treat MVL as a permanent step away from contracting in the same field; do not assume you can extract via MVL and resume in 6 months without consequences.
How MVL Works for Contractor Closures
A solvent contractor company with substantial retained profits goes through MVL as follows:
- 1Director declarations of solvency: written confirmation that the company can pay all debts within 12 months.
- 2Liquidator appointed: a licensed insolvency practitioner takes control of the company.
- 3Assets realised: liquidator collects any debtors, sells any assets, settles any creditors.
- 4Distributions to shareholders: net assets distributed as capital (CGT rather than dividend).
- 5Company dissolved: removed from the Companies House register.
Cost: typically £1,500-£3,500 + VAT for the liquidator on a straightforward contractor MVL. The tax saving versus dividend extraction is usually multiples of this cost on companies with £50,000+ of retained profits.
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Business Asset Disposal Relief on Company Closure
BADR (formerly Entrepreneurs' Relief) reduces the CGT rate on qualifying disposals, including MVL distributions where conditions are met:
- BADR rate: 14% for 2025-26 (rising to 18% over phased changes).
- Lifetime limit: £1 million of qualifying gains.
- Qualifying conditions: at least 5% of ordinary share capital and voting rights, held for at least 2 years before disposal, and the company must have been a trading company throughout.
- For a sole director-shareholder, conditions are easily met.
- Distributions above the £1 million limit are taxed at standard CGT rates (18%/24%).
For a contractor with £200,000 of retained profits closing the company, BADR + MVL produces around £28,000 of CGT versus the £67,000+ of dividend tax that would apply to the same amount distributed as dividends to a higher-rate taxpayer.
Dormancy During Bench Time
A contractor between engagements can keep the company dormant rather than closing it:
- No trading activity in the period.
- Limited filings: a confirmation statement annually, dormant accounts (much simpler than trading accounts).
- No corporation tax due (no taxable profits).
- Cost: minimal (£10-30/year accountancy plus the Companies House filing fees).
- When trading resumes, the company is reactivated and full compliance resumes.
Dormancy is the right choice when bench time is expected to be 3+ months and resumption is likely. Shorter gaps usually do not justify formally going dormant.
Strike-Off vs MVL
Strike-off (form DS01, £10 fee) is the lightest closure but distributions during the strike-off must stay below £25,000 (otherwise they are taxed as income, not capital). For contractors with retained profits above £25,000, MVL is required to access capital treatment. For contractors with minimal retained profits at closure, DS01 is the cheap option.
Managing Retained Earnings When Going Permanent
A contractor moving to permanent employment with substantial retained profits in the company has options:
- 1MVL immediately: extract the retained profits as capital with BADR. Cleanest but means closing the company entirely.
- 2Pension contributions before closure: company contributes to SIPP up to annual allowance; reduces retained profit before MVL.
- 3Continue with dormant company: keep the structure for potential future contracting work; extract via dividends gradually over years.
- 4Run as an investment company: convert to investment activity (rental, equities), but this changes the trading-company status and risks BADR eligibility.
Selling a Contracting/consultancy Business
Increasingly, established contractor businesses with niche expertise, repeat clients, and brand have sale value. The mechanics:
- Buyer typically a larger consultancy or specialist firm seeking to acquire the contractor's book.
- Valuation: typically 1-3x annual revenue depending on contract recurrence and client relationships.
- Structure: usually share sale (cleanest tax position for seller; BADR can apply at 14%).
- Earnout: portion of consideration deferred and contingent on continued client relationships.
- Post-sale: seller often continues for 12-24 months to transition relationships, paid as employee or consultant of the buyer.
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