Closing a Contractor Limited Company in 2026/27: Strike Off vs MVL

Closing a contractor PSC well is worth as much as running one well. The tax difference between a well-executed closure and a badly-executed one can be tens of thousands of pounds on the same reserves — and the wrong choice locks you out of Business Asset Disposal Relief entirely.

Here's the framework for 2026/27, the two routes, and the trap most contractors don't see until they've triggered it.

When contractors typically close a PSC

The common scenarios:

• Returning to permanent employment. Contract-to-perm move, usually with a leaving gift of retained profits to extract.
• Retirement. Winding down contracting, extracting the pension pot and any residual reserves.
• Long inside-IR35 run. If every reasonable engagement is being caught inside, the PSC framework stops adding value and an umbrella-only career becomes cleaner.
• Emigration. Moving abroad and needing to wind up the UK entity.
• Business change. Pivoting into a genuinely different trading model where a fresh company makes sense.

Whichever the reason, the mechanics come down to: getting the reserves out with the smallest tax bill, cleanly, and without triggering the anti-avoidance rules.

Route 1: Voluntary strike-off (DS01)

Strike-off is the simplest and cheapest option. You file form DS01 with Companies House (fee £33 online), give notice to interested parties (HMRC, creditors, shareholders), and after roughly 2–3 months the company is dissolved.

Before filing DS01 you must:

• Have ceased trading at least 3 months earlier — no new invoices, no active engagements.
• Have settled all creditors, including HMRC (final Corporation Tax, VAT, PAYE returns and payments all up to date).
• Have distributed all reserves to shareholders before filing. The company must be an empty shell at the point of dissolution.

The last point is the key one: how the reserves are distributed determines the tax treatment on the way out.

The £25,000 rule

Where total distributions to shareholders in the course of a strike-off are £25,000 or less, the distribution is treated as a capital distribution. That's usually the better outcome — capital gains tax rates and the BADR relief apply (see below).

Where total distributions exceed £25,000, all the distributions get treated as income (dividends) instead. The full amount gets taxed at your marginal dividend rate: 10.75% / 35.75% / 41.35% depending on band (2026/27 rates).

Route 2: Members' Voluntary Liquidation (MVL)

MVL is a formal solvent liquidation. A licensed Insolvency Practitioner (IP) is appointed to wind up the company, distribute the assets, and file the dissolution paperwork. Cost: typically £1,500–£3,000 all-in for a straightforward contractor PSC.

The critical difference: MVL distributions are always treated as capital, regardless of amount. So the £25,000 strike-off cap doesn't apply. You get capital gains treatment on the full extraction, unlocking BADR.

Basic MVL sequence:

1. Company ceases trading; final tax returns filed.
2. Directors sign a Declaration of Solvency stating the company can pay its debts within 12 months.
3. Shareholders pass a special resolution to wind up voluntarily.
4. Insolvency Practitioner appointed; distributes reserves to shareholders.
5. Final meeting held; company dissolved 3 months later.

Total elapsed time: typically 4–6 months from start to dissolution.

Business Asset Disposal Relief in 2026/27

BADR (formerly Entrepreneurs' Relief) reduces the CGT rate on qualifying business disposals. In 2026/27:

• BADR rate: 14% (up from 10% pre-April 2025 and 14% from April 2025)
• Standard CGT rate on chargeable gains above the annual allowance: 18% basic / 24% higher
• Annual CGT exemption: £3,000 (2026/27)
• Lifetime BADR limit: £1,000,000 of qualifying gains

To qualify for BADR on a PSC closure you need:

• To have been a director or employee throughout the last 2 years,
• To have held at least 5% of ordinary share capital and voting rights throughout the last 2 years,
• The company must have been a trading company throughout the qualifying period,
• The disposal must happen within 3 years of the trade ending.

Most contractor PSCs meet these tests trivially: sole director, 100% ownership, trading throughout, extraction within months of closure. The BADR path unlocks a materially lower effective tax rate on retained profits than an income distribution.

Worked comparison: strike-off vs MVL at £100,000 reserves

Assume a contractor closes with £100,000 of retained profits, higher-rate dividend band otherwise fully used.

Approach	Tax cost	Net to contractor
Strike-off (£100k > £25k threshold): income treatment at 35.75%	£35,750	£64,250
MVL with BADR at 14% (after £3k CGT allowance)	£13,580	£86,420
Net saving from MVL	—	£22,170

At £100k reserves, MVL saves roughly £22k even after paying £2k liquidator fees. The break-even where MVL fees roughly equal the extra tax saved sits at around £40,000–£50,000 of reserves; above that, MVL is materially better.

The TAAR trap — the anti-phoenix rule

The Targeted Anti-Avoidance Rule (TAAR), introduced in 2016, exists to stop contractors closing a PSC to get capital treatment, then setting up a fresh one to carry on the same trade — the "phoenix" pattern.

Under TAAR, HMRC can re-characterise a capital distribution as an income distribution (taxed at your marginal dividend rate) if all four conditions are met:

1. The individual received a distribution in a winding-up of a close company (usually your PSC).
2. Within two years of the distribution, the individual is involved in a similar trade or activity.
3. The individual held at least 5% of the close company (as they will for a PSC).
4. It is reasonable to assume that a main purpose of the winding-up was to obtain a tax advantage.

All four conditions have to be met. The one contractors most commonly fall foul of is condition 2 — setting up a new PSC within 2 years and continuing to do broadly similar work.

The step-by-step sequence for a clean MVL

1. Confirm eligibility. Check BADR conditions, TAAR risk, and reserves amount with your accountant.
2. Cease trading. No new engagements, no new invoices. Wind up existing WIP cleanly.
3. Final HMRC returns. Corp tax, VAT, PAYE all filed and paid. Ideally a formal deregistration from VAT and PAYE.
4. Prepare the Declaration of Solvency. Directors sign a sworn statement that the company can pay debts within 12 months.
5. Instruct an Insolvency Practitioner. Most contractor-focused MVL providers work at fixed fees. Get quotes from 2–3 IPs. Timing: this is when the process formally starts.
6. Shareholders' resolution to wind up. Special resolution (75% majority).
7. Distribution. The IP distributes cash to shareholders, usually in one or two tranches. Full distributions typically complete within 60–90 days.
8. Final accounts + meeting. IP files the closing paperwork; company dissolved 3 months later.

Common mistakes contractors make on PSC closure

• Trying to strike off with £25k+ reserves. The income treatment reclassification isn't optional — HMRC reclassifies automatically. You lose BADR and pay full dividend rates instead of capital rates. Get MVL advice first.
• Not planning the strike-off distribution across tax years. If you're using the strike-off route, splitting the distribution across two tax years to use the £3,000 CGT allowance twice can save a few hundred quid. Marginal but free.
• Ignoring TAAR before setting up a new PSC. If you're closing to consult through a fresh PSC on similar work, the 2-year clock is a real constraint. Model this before triggering the wind-up.
• Distributing reserves before dissolution paperwork is complete. Dividends declared out of insufficient reserves at the closure stage are unlawful. Reserves check is critical before the final distribution.
• Choosing an IP on price alone. Some contractor-focused MVL specialists advertise very low fees but have hidden add-ons (director's meeting fees, notice publication fees, additional distributions). Get a full-fixed-fee quote in writing.

The honest bottom line

For a UK contractor PSC with reserves under £25,000, a voluntary strike-off is clean, cheap and tax-efficient — the capital treatment plus BADR wins.

For reserves above £25,000, MVL is the default correct answer. The £1,500–£3,000 in liquidator fees is dwarfed by the tax saving on anything from £40k of reserves upwards. Don't strike off with £60k+ sitting in the company and take the income hit — it's the single most expensive avoidable mistake in PSC closure.

Whichever route: get the sequence right, keep the paperwork clean, and don't fall into TAAR by rushing straight into a new PSC on the same clients. The tax saved on a clean closure is often the equivalent of a couple of months of billable work — well worth the time spent doing it properly.