Small business insolvency – how to close down a small business in the UK
Deciding to close a small business is never easy, particularly if you’ve poured your heart, soul, energy, time, and money into building up the company to what it is today.
Whether it’s out of choice due to retirement, opting for a new challenge, or taking your money to invest in something else, or something that is forced on you by insolvency, closing a business can be stressful and time-consuming.
Our experts at the Liquidation Centre are here to take you through the liquidation process for SMEs and the different stages of how to close down a small business in the UK.
SME insolvency
What is SME insolvency?
SME insolvency occurs when a small or medium-sized business cannot pay its debts or the value of its total liabilities exceeds that of its assets.
This can lead to formal insolvency procedures, such as administration, liquidation, or a company voluntary arrangement (CVA), which are overseen by a licensed insolvency practitioner.
What causes SME insolvency?
SME insolvency can happen due to various reasons, including:
- Cash flow problems – unable to pay bills on time (such as taxes owed to HMRC or products from suppliers). This could be due to insufficient funds or delayed client payments.
- Poor financial management – such as poor record-keeping, incorrect forecasting, lack of starting capital, inadequate internal regulation or unnecessary expenditure.
- External economic pressures – increasing operational costs, inflation, and rising interest rates.
- Unforeseen circumstances – (e.g. global pandemics and significant markets disruption or unforeseen “acts of god” events.)
What options are available to those facing SME insolvency?
If an SME is likely to become insolvent, several options are available to mitigate the risk or minimise the negative impacts.
You should take prompt action and seek professional guidance from an insolvency expert, such as those at the Liquidation Centre.
With free, impartial advice, you can assess the options available to you and see which might be best for you and your business.
- Informal restructuring: Engaging with creditors at the earliest opportunity shows a proactive approach to the situation. Negotiating payment terms and making internal changes to how you run things could help resolve the issue before it becomes a bigger problem.
- Company Voluntary Arrangement (CVA): This is a binding agreement between you and your creditors to repay any debts over a set period of time. This allows you to continue trading under supervision from a designated insolvency practitioner.
- Administration: If the situation is unresolvable, then an insolvency practitioner will take control of your company. Their statutory objective is to rescue the company as a going concern or achieve a better result for creditors than through a liquidation procedure.
- Liquidation: If all else fails, your final option is to close or dissolve your business. If Liquidation is the most suitable route , the company assets will be sold, with the proceeds applied in accordance with insolvency law to cover the liquidation costs and repay creditors where possible. This can happen via a creditors’ voluntary liquidation (CVL), initiated by directors, or through compulsory liquidation via a winding-up petition.
Directors of SMEs facing potential insolvency should be aware of their legal responsibilities.
If your business becomes insolvent, any decisions you make must be in the best interests of creditors (not you or the company).
Failure to do so can result in legal consequences including potential director disqualification or personal liability in certain circumstances.
Gaining early professional advice from an insolvency expert can help navigate this process, support compliance with statutory duties, and may improve the prospects of business recovery.
Closing down a small business in the UK
When it comes to closing down a small business, you’ll usually need the agreement of the company’s directors and shareholders. subject to the company’s constitutional and statutory requirements.
The way you close your company depends on whether it is solvent or insolvent and able to pay its debts as they fall due.
- Small business solvency
As a solvent company (i.e. you can pay your bills and settle any outstanding debts with your creditors), you can either:
- Apply to have your business struck off the Companies Register subject to meeting statutory eligibility requirements.
- Start a members’ voluntary liquidation (MVL)
Expert advice from an insolvency practitioner can help determine the most appropriate option for your circumstances.
Small business insolvency
As an insolvent company (i.e. unable to pay its debts or meet its financial obligations to creditors), the method of closing or winding up your business will depend on your specific circumstances.
As part of your legal responsibilities as a director, you must act in the best interests of the company’s creditors. Any decisions you make must protect their interests and minimise the risk of further financial losses.
Depending on your specific circumstances, the following options may be available to you:
- Put the company into administration: This may be an option if there is a possibility of rescuing the company or restructuring its debts.
- Apply for the company to be struck off the Companies Register: This option may be possible if the company has not traded in the last three months, has no assets, and is not facing any legal claims.
- Arrange for voluntary liquidation: If the company is insolvent and cannot be rescued, a Creditors voluntary liquidation may be the most appropriate course.
It’s best to contact a licensed insolvency practitioner, such as the Liquidation Centre, to discuss the pros and cons of each option.
Small business liquidation
In some instances, the decision may be out of your hands. If debts go unpaid or creditor issues aren’t resolved, creditors may take legal action, including presenting a winding-up petition.
This process is known as compulsory liquidation.
In certain circumstances, a Company Voluntary Arrangement (CVA) may provide an alternative to liquidation by allowing the company to continue trading while repaying debts under a formal agreement with creditors.
If the business is viable as a Going Concern, an Administration might also offer a solution for the business.
How to close down a small business
Before you take action, plan and consider how and when you will close your business.
Organisations often have many moving parts, sometimes involving multiple stakeholders where insolvency is likely or confirmed, prioritise the interests of creditors in accordance with their statutory duties.
Because of this, closing a business can take time and careful consideration. You should take reasonable steps to consider the needs of stakeholders and creditors, to whom directors have a legal obligation when a company is facing financial difficulty.
The following steps outline how to close down a small business
1. Prepare for closure
Set out a timeline for who you need to contact, any required paperwork, and when each step of the relevant insolvency or closure process is due.
This could include, but is not limited to, the following:
- Accountant
- Customers
- Suppliers
- Landlord
- Insurance company
- Employees
- Business bank
- HMRC
- Creditors
- Any other professional or legal bodies relevant to your business
You should also look at which payments are overdue, any contractual obligations you may have, and the termination procedure.
It’s also worth checking any leasehold agreements in place to see how much notice is required, how it must be submitted, and any personal guarantees you’ve agreed to.
You’ll also need to account for any costs incurred between now and when you cease trading (such as rent, energy bills, and supplier costs). This will ensure you have enough to cover any bills and not accrue any further debts.
2. Your duty as an employer of a small business
Before making any decisions, you should seek professional advice from a licensed insolvency practitioner, such as the Liquidation Centre.
This will ensure your actions comply with your legal responsibilities as a director and employer.
You need to be mindful of your employees’ rights and follow the correct redundancy consultation requirements if redundancies are proposed.
Note: If you intend to make 20 or more redundancies within 90 days, you are required to carry out collective consultation with employee representatives for at least 30 days (or 45 days where 100 or more redundancies are proposed), in addition to individual consultation requirements.
You may also need to:
- Inform HMRC that you’ve stopped employing staff
- Pay their final wages as well as any outstanding PAYE and NI contributions
- Send out P45s to your employees
- Send final payroll reports to HMRC
- Close down any payroll schemes
Employees may also be entitled to claim certain unpaid amounts and redundancy payments from the Redundancy Payments Service if the company enters formal insolvency.
3. Closing down your small business
To close down a small business, you usually need the agreement of directors and shareholders before implementing an exit strategy.
The steps involved will depend on whether your business is facing solvent liquidation or insolvent liquidation:
Solvent company
If a solvent small business can pay its debts and settle any outstanding financial disputes with creditors. In this case, you can apply for a Members’ voluntary liquidation (MVL).
An MVL is only available when the majority of its director(s) can provide a statutory declaration of solvency. This means the company must be able to pay all debts in full within 12 months.
Once this declaration is made, shareholders must pass a special resolution, requiring at least 75% majority agreement within five weeks to begin the members’ voluntary winding-up process.
In an MVL, shareholders appoint the liquidator and oversee decision-making, although the liquidator retains statutory responsibilities and must act in accordance with insolvency law.
Insolvent company
If your small business is insolvent and unable to pay its debts, it’s unlikely that you’ll be able to get your small business struck off the Companies House register.
This is because the strike-off notice is advertised in the London Gazette and creditors are likely to object to the proposal.
In such circumstances, a Creditors’ Voluntary Liquidation (CVL) is usually required. Once in liquidation, the liquidator’s fees are settled, and any remaining funds are made to creditors where possible in order of legal priority. Shareholders receive funds only after all creditors have been paid.
A CVL begins when at least 75% of the shareholders agree to wind up the company and nominate an insolvency practitioner to act as liquidator. The creditors are then invited to a decision procedure, where they can either confirm the shareholder’s choice or appoint a different liquidator.
The directors are also responsible for producing a Statement of Affairs and sending it to the company’s creditors within seven days of the agreed resolution.
4. Announcing the closure
Once all preparations have been made to close down the company and legal responsibilities have been adhered to, you need to decide how you’ll announce the closure of your small business and who to tell.
This will include (but is not limited to) the following:
- HMRC
- Employees
- Insurance companies
- Professional bodies
- Landlord
- Suppliers and contractors
Where the company is entering formal insolvency, statutory notices and creditor communications will normally be issued by the appointed office-holder.
Note: If you’re registered under the Construction Industry Scheme (CIS), you must inform HMRC that you wish to stop trading as a contractor or subcontractor.
5. Paying taxes
Once you start closing your small business, this is likely to create a final accounting period for tax purposes, which does not necessarily run for a full 12 months.
You must:
- Submit your final statutory accounts and business tax return
- Pay your final tax bill (including corporation tax, VAT, and NI)
- Cancel your VAT registration
It’s worth noting that you must pay corporation tax at the same rate as taxable profits (e.g. if you sell off any assets to pay creditors).
Capital Gains Tax
If you sell an asset that’s increased in value, tax treatment will depend on whether the disposal is made by the company or by you personally as a shareholder.
Where distributions are made to shareholders in a solvent liquidation, Capital Gains Tax (CGT) may apply and should be reported through the appropriate self-assessment process, with records retained in line with HMRC requirements.
You may be eligible for Business Asset Disposal Relief (BADR), previously known as Entrepreneur’s Relief, which can reduce the rate of CGT payable on qualifying disposals, subject to meeting the relevant conditions and lifetime limits in force at the time of disposal.
For disposals qualifying on or after 6th April 2025, the CGT rate under BADR is 14%, rising to 18% from 6th April 2026. The lifetime limit for qualifying gains remains at £1 million. To be eligible for BADR, you generally need to have owned the business or its shares for at least two years.
Once you’ve paid any taxes due and filed your returns, you can close your business bank account. Any remaining funds after dissolution that are not distributed to shareholders will pass to the crown as bona vacantia.
Important note: If you start or become involved in a similar business within two years of receiving funds from a Members’ Voluntary Liquidation, HMRC may treat the distribution as income rather than a capital gain where a tax advantage was a main purpose. Professional tax and insolvency advice should be taken before proceeding.
For more information, see our page on how to close my limited company.
Small business liquidation services
With more than 20 years of experience, the Liquidation Centre is an award-winning company offering a range of liquidation services to help organisations of all sizes, including small businesses.
Whether you’re unable to pay debts, trading at a loss, or considering retiring, our team of experienced liquidation specialists and licenced Insolvency Practitioners are here to answer any questions you may have.
We aim to make the liquidation process as smooth and straightforward as possible.
For both insolvent and solvent small businesses, our in-house insolvency experts are available to discuss your options and help you close your company down with confidence and reduced stress.
Small business insolvency guidance
If you’re thinking about putting your small business into liquidation or seeking specialist advice about your exit strategy, it’s important to seek the advice of a licensed Insolvency Practitioner.
At the Liquidation Centre, our team of licensed insolvency practitioners are on hand to offer information on the liquidation process, how it applies to your company, the options available, and how they apply to your business.
Our small business insolvency support has already helped over 1,000 SMEs navigate the liquidation process.
Contact us today for a quote or free advice to see how we can help your organisation wind down smoothly and successfully.
Final thoughts
At the Liquidation Centre, we understand that choosing to liquidate your business at any stage is a tough decision.
No more so for small business owners, who have often invested time, energy, and money into trying to make their company a success. Pulling the plug may feel like you’re giving up.
However, if your business is no longer profitable or is accruing debt, then liquidation may be one option to consider to manage the situation responsibly.
We’re here to guide you through the small business liquidation process, helping you meet your legal responsibilities, fulfil your legal obligations and in accordance with insolvency law and help manage the winding up your company.
Contact us for more information. Our insolvency experts are on hand to offer a free consultation, arrange a meeting, or get a quote to help you on your journey.
Trading Insolvent FAQs
What is small business insolvency? ▸
Small business insolvency in the UK occurs when a company with fewer than 50 employees is unable to pay its debts when due, or when the total value of its liabilities exceeds its assets.
Small business insolvency by way of liquidation is the formal statutory process of winding up a company. This usually involves realising company assets and distributing the proceeds to creditors in accordance with insolvency law before the company is removed from the Companies House register.
How to liquidate a small business ▸
To liquidate a small business in the UK, you must first determine whether it’s solvent (i.e. it can repay its debts) or insolvent (i.e. it cannot repay its debts).
This will determine whether a Members’ Voluntary Liquidation (MVL) or Creditors’ Voluntary Liquidation (CVL) is appropriate.
Once the decision to liquidate has been made, a licensed insolvency practitioner will be appointed to act as liquidator. They will then oversee the process and ensure it complies with insolvency legislation.
A licensed insolvency practitioner from the Liquidation Centre can also help directors understand their legal responsibilities and the most appropriate outcomes for creditors and shareholders.
How much does it cost to liquidate a small business? ▸
The cost to liquidate a small business in the UK typically falls between £3,000 and £7,000 (plus VAT) for a CVL and between £1,500 and £4,000 (plus VAT) for an MVL.
Actual costs will depend on several factors, including:
- The size of your company and the complexity of its financial issues
- Whether you need to sell assets (asset liquidation and realisation)
- Any insolvency practitioner fees
••Any disbursements and other legal costs
Do I have to close my small business if my company is no longer trading? ▸
This depends on the company’s financial circumstances. A company that is no longer trading or receiving income may become dormant, but it will remain registered at Companies House and must continue to file annual accounts and confirmation statements as required.
If your company is insolvent and continues trading, directors may face personal liability in certain circumstances, particularly where losses to creditors are worsened. This could require you to make a financial contribution to the insolvent estate , which is why it is important to seek professional advice and cease trading where appropriate once a risk of insolvency is identified.
Can a sole trader go into liquidation? ▸
Technically speaking, no, a sole trader cannot go into liquidation as this is a process specific to limited companies or other corporate entitles
In law, a sole trader and their business are the same.When a sole trader is unable to pay debts, the appropriate routes are via personal insolvency procedures, such as bankruptcy or an Individual Voluntary Arrangement (IVA).