Closing, Pausing, or Selling Your Contracting Company

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.

How MVL works for contractor closures

A solvent contractor company with substantial retained profits goes through MVL as follows:

1. 1Director declarations of solvency: written confirmation that the company can pay all debts within 12 months.
2. 2Liquidator appointed: a licensed insolvency practitioner takes control of the company.
3. 3Assets realised: liquidator collects any debtors, sells any assets, settles any creditors.
4. 4Distributions to shareholders: net assets distributed as capital (CGT rather than dividend).
5. 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.

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.

Managing retained earnings when going permanent

A contractor moving to permanent employment with substantial retained profits in the company has options:

1. 1MVL immediately: extract the retained profits as capital with BADR. Cleanest but means closing the company entirely.
2. 2Pension contributions before closure: company contributes to SIPP up to annual allowance; reduces retained profit before MVL.
3. 3Continue with dormant company: keep the structure for potential future contracting work; extract via dividends gradually over years.
4. 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.