My Business Failed — What to Do Now

Closing down, losses, starting again — with emotional honesty and procedural clarity

Your business failing is brutal, but there is a clear UK-specific roadmap through it. The first 48 hours: stop taking on new liabilities and check whether you are insolvent (can't pay debts as they fall due, or liabilities exceed assets). If insolvent, stop trading unless recovery is realistic — continuing creates wrongful trading risk under Insolvency Act 1986 s.214. Terminal loss relief under ITA 2007 s.89 lets sole traders carry back final-year losses against the previous three years' profits, potentially generating a real tax refund from years when the business was profitable.

Last reviewed: 26 May 2026

Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact HMRC. Read our editorial scope →

The first 48 hours

Don't make new commitments. Stop taking deposits, stop signing new contracts, stop ordering stock. Get a cash picture: bank balance today, money owed to you (and realistically collectable), money you owe (and when it's due). Then run the two insolvency tests: cash-flow (can you pay debts as they fall due?) and balance-sheet (do liabilities exceed assets at fair value?). Failing either makes you insolvent. If insolvent, stop trading unless there is a clear, time-bound recovery plan — continuing to trade while insolvent is the trigger for wrongful trading liability. Notify staff about wages, freeze VAT/PAYE direct debits to assess, diary every imminent deadline. Get human support: R3 has a free 'Confidential Helpline' for directors; Business Debtline 0800 197 6026 is free and impartial; StepChange handles personal debt; Samaritans 116 123 is 24/7 for the mental health side, which is the part most articles skip.

Sole trader: closing down

As a sole trader you and the business are legally the same person — unlimited personal liability for every debt. Closing down is administrative rather than legal: tell HMRC you have ceased trading (final SA return with cessation date; deregister for VAT via VAT7 within 30 days of stopping taxable supplies; close PAYE scheme with final FPS/EPS; deregister CIS if applicable). Settle what you can. For tax debts, HMRC's Time to Pay service (0300 200 3835) can spread payment over 6–36 months without insolvency. If debts genuinely cannot be paid, the options are an Individual Voluntary Arrangement (formal deal with creditors, 5 years typical), a Debt Relief Order (eligibility caps on debt, income and assets — currently £50k debt, £2k assets, £75/month surplus), or personal bankruptcy as a last resort. All three sit on your personal credit file for 6 years; bankruptcy normally lasts 12 months but the credit impact persists.

Ltd company: closing down

Once a company approaches insolvency, your directors' duties shift from acting in the company's interests to acting in the creditors' collective interests (a duty crystallised in BTI v Sequana [2022] UKSC 25). The main routes:

Creditors' Voluntary Liquidation (CVL)

Directors initiate, shareholders pass a winding-up resolution, a licensed insolvency practitioner is appointed as liquidator, a meeting of creditors is held, and assets are realised and distributed in the statutory order (fixed-charge holders, liquidator's fees, preferential creditors including HMRC for VAT/PAYE/NIC, floating-charge holders, unsecured creditors, shareholders). Most ordinary insolvent corporate failures end here.

Compulsory liquidation

A creditor (often HMRC) petitions the court to wind up the company. Slower, more expensive, more antagonistic, and the Official Receiver investigates conduct.

Administration

A rescue procedure giving the company a moratorium from creditor action while an administrator tries to rescue it, sell the business as a going concern, or achieve a better result for creditors than liquidation. Sensible where there is genuine going-concern value.

Limited liability — and when it pierces

The limited liability shield holds in most cases. It pierces for: personal guarantees signed by directors; wrongful trading under s.214 (continued trading when insolvency was unavoidable); fraudulent trading under s.213 (carried on to defraud creditors); overdrawn director's loan accounts at liquidation; misfeasance under s.212. Since 1 December 2020 (FA 2020) HMRC has secondary preferential status for VAT, PAYE income tax, employee NIC and Construction Industry Scheme deductions — meaning HMRC ranks ahead of floating-charge holders and unsecured creditors for those taxes, which materially reduces what is left for everyone else.

Telling HMRC — detail

Sole trader: file a final Self Assessment return with the cessation date in the self-employment pages, calculate any final-year terminal loss relief claim, deregister for VAT via VAT7 within 30 days of stopping taxable supplies (file final VAT return within 1 month of deregistration date), submit final FPS/EPS through payroll and notify HMRC PAYE the scheme is closing, deregister for CIS if a subcontractor or contractor. Company: file a final CT600 covering the period to the cessation/liquidation date, deregister for VAT, close PAYE, notify HMRC of liquidation so it can lodge as a creditor. Engage Time to Pay (0300 200 3835) early — HMRC is materially more flexible with directors and sole traders who pick up the phone before missing payments than with those who wait for enforcement.

Terminal loss relief

If your final year of trading produces a loss, terminal loss relief lets you carry that loss back against profits from earlier years — turning losses into a real tax refund from previous profitable years.

Sole traders — ITA 2007 s.89

The terminal loss is the loss of the final 12 months of trading. It is carried back against trading profits of the three tax years before the year of cessation, taking the most recent year first (LIFO). Worked example flavour: a builder who made £40k profit/year for three years and then made a £30k loss in their final year can claim that £30k against the most recent year's £40k profit, generating a refund of the income tax + Class 4 NIC originally paid on that £30k slice. Claim is made on the final SA return; deadline is the first anniversary of 31 January following the tax year of cessation.

Companies — CTA 2010 s.39

A company's terminal trading loss can be carried back against profits of the previous three accounting periods (extended from the standard 12-month carry-back). The loss arises in the final 12 months of trading before the trade permanently ceases. Useful where a previously profitable company is being wound up — it can extract value from previous corporation tax payments.

Time limits

Sole trader: claim must be made within 4 years of the end of the tax year in which the trade ceased. Company: claim within 2 years of the end of the accounting period in which the loss arose (extendable in specific circumstances).

Capital losses and capital allowances

On cessation, remaining plant and machinery in your capital allowance pool generates a balancing allowance or balancing charge. Assets sold at less than tax written-down value produce a balancing allowance (a deduction against final-year profits). Assets sold at more produce a balancing charge (added to final-year profits). Assets simply abandoned go in at nil market value. Goodwill that proves worthless on cessation can in some cases generate a capital loss for the company (intangibles regime) but the rules are tight — get advice. For sole traders, capital losses on business assets sit in the personal capital gains pool and carry forward against future chargeable gains.

Outstanding tax debts

Sole trader: HMRC is an unsecured creditor for income tax, Class 4 NIC and (post-1 December 2020) ranks as secondary preferential for VAT, PAYE and employee NIC if you had employees. HMRC's enforcement tools include Direct Recovery of Debts (DRD) from your bank account for debts over £1,000, Distraint, attachment of earnings if you take new employment, and ultimately bankruptcy petition. Company: HMRC has secondary preferential status (FA 2020) for VAT, PAYE income tax, employee NIC and CIS deductions — ranking ahead of floating-charge holders and unsecured creditors. For corporation tax, HMRC remains an unsecured creditor.

Bounce Back Loans, CBILS and Recovery Loans

Bounce Back Loans (BBLs) carry a 100% government guarantee, were issued without personal guarantees, and capped at £50,000 or 25% of turnover. Used legitimately for the business, there is no personal liability — the lender claims against the government guarantee if the company can't repay. CBILS (Coronavirus Business Interruption Loan Scheme) carried an 80% government guarantee and may have required a personal guarantee above £250,000. Recovery Loan Scheme (RLS) terms vary by lender. The Insolvency Service actively investigates BBL misuse — common red flags are dividends paid out of BBL funds when the company had no distributable reserves, BBLs taken by businesses that weren't trading, multiple BBLs across connected entities, and transfers to directors disguised as repayments of loans that never existed. Misuse can lead to personal liability and director disqualification.

Redundancy and the National Insurance Fund

Employees made redundant when the company becomes insolvent have a statutory right to redundancy pay calculated on the standard formula: half a week's pay for each year aged under 22, one week per year aged 22–40, one-and-a-half weeks per year aged 41+, capped at 20 years and a weekly cap (currently £719 in 2025/26). Where the company cannot pay, the National Insurance Fund (NIF) covers statutory redundancy plus claims via form RP1 for up to 8 weeks of unpaid wages, up to 6 weeks of accrued holiday, and up to 12 weeks of statutory notice pay, all subject to the same weekly cap. Directors are generally not entitled to NIF redundancy unless they were under a genuine contract of employment with the company (signed contract, PAYE wages, work performed under direction) and have at least 2 years' continuous service. A 'director-shareholder paying themselves a small salary' typically fails this test.

Director disqualification

The Company Directors Disqualification Act 1986 lets the Secretary of State seek a disqualification order against directors whose conduct made them unfit to be involved in company management. Common triggers: continuing to trade while insolvent (wrongful trading), failing to pay tax (especially Crown debts like VAT and PAYE), failing to keep proper accounting records, breaches of director duties under the Companies Act 2006, fraudulent activity, breaches of competition law. The liquidator submits a D-report to the Insolvency Service within 3 months. Disqualification periods range from 2 to 15 years and are public on the Companies House register. While disqualified you cannot be a director or be involved in the promotion, formation or management of a company, directly or indirectly. Breach is a criminal offence and creates personal liability for any debts of a company you act in the management of during the disqualification period.

Starting again

Sole trader: restart trading immediately if you want to. Unused trading losses from the failed business carry forward under ITA 2007 s.83 against future profits of the same trade only — not a different trade. If you went bankrupt, the trustee in bankruptcy handles disposal of pre-bankruptcy assets but doesn't prevent you working. Director: restart immediately unless disqualified under CDDA 1986. Be aware of IA 1986 s.216 — for 5 years you cannot be a director of (or be involved in the management of) a company with the same name or a 'similar name' as the failed company, unless one of three specified exceptions applies. Breach is a criminal offence + personal liability for the new company's debts. Losses inside the failed company die with the company; they cannot transfer to a new one. Personal credit is directly affected only via personal guarantees, IVAs, DROs, bankruptcy and CCJs — not by company insolvency per se. On the emotional side: R3, Business Debtline, StepChange, Samaritans 116 123, and the SAMH/Mind networks all see thousands of post-failure callers every year. The single most-cited regret in published research is people who didn't ask for help early enough.

Statute references: Insolvency Act 1986 s.213 (fraudulent trading); Insolvency Act 1986 s.214 (wrongful trading); Insolvency Act 1986 s.216 (re-use of company name); Company Directors Disqualification Act 1986; ITA 2007 s.83 (carry-forward of trading losses); ITA 2007 s.89 (terminal loss relief for sole traders); CTA 2010 s.39 (terminal loss relief for companies); ERA 1996 Part XI (statutory redundancy); Finance Act 2020 (HMRC secondary preferential status).

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Frequently asked questions

What happens if I miss the Self Assessment deadline?+

The Self Assessment deadline is 31 January (online filing) for the previous tax year. Miss it and HMRC apply an automatic £100 penalty. Beyond that: £10 per day from 3 months late (capped at £900), 5% of tax due at 6 months late, and another 5% at 12 months late, under Schedule 55 of the Taxes Management Act 1970. If you have a genuine reason (serious illness, bereavement, technical issue with HMRC's systems) you can appeal with evidence; HMRC accepts reasonable excuse appeals in most genuine cases.

Do I need an accountant or can I file Self Assessment myself?+

Legally you can file Self Assessment yourself via gov.uk for free, most simple sole-trader returns (single income source, basic expenses) are realistic to self-file. An accountant adds real value when: your trading profit is above £40,000 (extraction-strategy decisions matter), you have multiple income streams (PAYE + self-employment + property + dividends), you've crossed the £90,000 VAT threshold, you're considering incorporation, or you have an HMRC enquiry. Expect to pay £400-£1,500/year for a typical sole-trader accountant; the cost is itself a deductible expense.

How do payments on account work?+

When your Self Assessment tax bill exceeds £1,000 for the first time, HMRC requires payments on account toward NEXT year's tax. Half the current bill is due 31 January (alongside the current bill); the other half is due 31 July. So your first January after crossing the threshold can hit with a double-bill: last year's balance + first payment on account. Adjust via Form SA303 if you expect next year's income to drop substantially. Payments on account don't apply if more than 80% of your tax is collected via PAYE.

Am I personally liable for company debts?+

Generally no — that is the whole point of a limited company. Creditors can only pursue company assets, not your personal assets. There are four main exceptions: (1) personal guarantees you signed (most commercial property leases, many bank facilities, some supplier accounts); (2) wrongful trading under IA 1986 s.214, where directors continued trading when they knew or ought to have known the company couldn't avoid insolvent liquidation; (3) fraudulent trading under s.213, where the business was carried on to defraud creditors; (4) overdrawn director's loan accounts at liquidation, which become a debt the liquidator pursues you for. Sole traders, by contrast, have unlimited personal liability for all business debts.

What happens to my Bounce Back Loan if the company goes under?+

Bounce Back Loans (BBLs) carry a 100% government guarantee and were issued without personal guarantees. If your company enters liquidation and the BBL cannot be repaid from company assets, the lender claims against the government guarantee — you are not personally pursued, provided the loan was used legitimately for the business. Misuse (e.g. paying it to yourself as a dividend you weren't entitled to, transferring it to a connected company without commercial substance, or applying for one when you weren't trading) can trigger Insolvency Service investigation and personal liability, including director disqualification. CBILS loans up to £250k were similar; above £250k, personal guarantees may apply. Recovery Loan Scheme PGs vary by lender.

Can I start a new business after failure?+

Sole traders can start trading again immediately — there is no waiting period. Unused trading losses from the failed business carry forward against future profits of the same trade under ITA 2007 s.83, but not against a different trade. Company directors can be appointed to a new company immediately unless they have been disqualified under CDDA 1986. Losses inside the failed company die with it (they cannot transfer to a new company you set up). There are restrictions under IA 1986 s.216 on reusing the failed company's name or a similar one for 5 years — breach is a criminal offence and creates personal liability for new company debts.

Does business failure affect my personal credit score?+

Indirectly. Sole trader business debt is personal debt — defaults, CCJs, and any IVA/DRO/bankruptcy go on your personal credit file and stay for 6 years. Company debt that the company defaults on is on the company's record, not yours personally — unless you signed personal guarantees, in which case the guarantee defaults hit your personal file. Director disqualification itself doesn't directly affect your credit score but is publicly searchable on the Companies House register and will appear in any director/credit check a future lender, landlord or business partner runs.