Closing a company can be a daunting prospect, but it can be made much easier if you get help from an expert. The reasons for closure are often linked as much to a directors personal circumstances as they are to their finances, and the costs associated with the process of closure can at first glance seem off putting. However, by choosing a tax efficient way to close a company, these costs can actually be outweighed by the reduction in taxes due, making closure the most efficient way to transfer assets into the hands of the shareholders.
In light of the pandemic, many company directors across the nation have been forced to make the difficult decision to close their company. Though their reasons for closing might differ, from retirement to seeing no reasonable prospect for future prosperity, there is usually a common theme – that it must be done in a cost efficient way.
In this article, we will be discussing one of the most tax and cost-efficient methods of closing a limited company – a Members’ Voluntary Liquidation (MVL).
What is an MVL?
An MVL, or Members’ Voluntary Liquidation, is the most tax-efficient process of voluntarily closing down a solvent company. A solvent company is one that has the money on hand to pay its debts and other liabilities in no more than 12 months. If this does not apply to your company, an MVL is not the best solution for you. Consider other forms of liquidation, such as a Creditors’ Voluntary Liquidation (CVL), instead.
The process is headed by a professional insolvency practitioner, a specialist in liquidating companies with close adherence to the law. Despite the name, they are not exclusively used to close insolvent companies, and can offer the assurance that the liquidation of your company will be both legal and as beneficial to you as possible. They will ensure that your company’s profits are extracted properly and end up in your account. While following the law to the letter. You have obligations when closing a company, and the punishments for breaking them are severe, regardless of whether it is accidental or not, so using a professional to do the heavy lifting is a common option.
Starting the MVL process
Starting the MVL process is quite simple, requiring only two things on your part:
- Declaration of solvency – Your first step is to sign a declaration of solvency. This entails declaring that, to your knowledge, your company is solvent, and declaring the assets owned by the company, along with the liabilities it currently has. Knowingly making a false declaration of solvency is serious, carrying a prison sentence and fines if you do so.
- Appoint a professional insolvency practitioner – With the declaration of solvency signed, your next and last step is to appoint a professional to execute the process. The most common professional used is an insolvency practitioner, though there are other options. Their job is to ensure your company’s liabilities are paid, and the company is closed properly. Ending the process by distributing any remaining capital to you.
Why close a company using an MVL?
Closing a company using an MVL isn’t the only method available, so what makes it such a good idea?
Simply put, tax efficiency and legal protection. As we mentioned earlier, appointing a professional gives you the peace of mind that the process will be carried out carefully and within legal limits. There are many rules and obligations surrounding the proper method of closing a company. They can be easy to accidentally fall afoul of if you execute the process personally. Though it will cost you, entrusting the process to a licensed professional will ensure those punishments do not befall you.
Tax efficiency is the second major benefit. When closing your company, any extracted profits in excess of the £12,300 annual exempt amount will be subject to Capital Gains Tax, which is lower than income tax.
Your profits are taxed at a lower rate as they are classified as a capital distribution. This often makes you eligible for business asset disposal relief, subjecting your profits to a 10% capital gains tax rate. Through the second most popular method of closing a company, dissolution, profits in excess of £25,000 are treated as income. Meaning you’ll be paying dividend tax at its appropriate marginal rate. This rate is overwhelmingly more costly than paying the 10% capital gains tax through the business asset disposal relief scheme.
The costs of closing a company using an MVL
So far, we have discussed what you can save when closing your company through the MVL process. While it is certainly the most tax-efficient option, an MVL is much more costly than a dissolution. When deciding whether to choose an MVL or a dissolution, the question of efficiency comes down to whether the tax savings from your company’s retained profits outweigh the increased costs of the MVL process. But what are the costs?
At Clarke Bell, MVLs start from just £1,495 + VAT. There are several parts that make up this cost, the highest being the appointed liquidator’s fee. They will be doing most of the heavy lifting for you, and so make up the bulk of the cost. In addition to this fee, you must pay to file the closing of your company with the Companies’ House. You must also pay to announce the closing of your company in the Gazette. Which allows creditors to contest the closing if you still owe them money. The overall cost of the process varies depending on the size of the company. In general only companies with very little assets will find that the cost of an MVL outweighs the considerable tax benefits.
Clearly, an MVL is an incredibly tax-efficient method of closing your company. However, the potential tax savings are balanced by the cost of the process. As such, it only makes sense to use an MVL if your company has a significant well of retained profits. In excess of £25,000 at the least. Anything less, and striking off is likely your best option.
If you are considering closing your company using an MVL, Clarke Bell can help. We have accumulated over 28 years of experience in helping companies close, both through the MVL process and otherwise. To find out whether an MVL is right for you, contact our specialists today.