When liquidating a company, your options are contingent upon your company’s financial state.
A Creditors’ Voluntary Liquidation (CVL) and, potentially business rescue, is often your best option if your company is insolvent (i.e. can’t pay its debts).
However, for a solvent company a Members’ Voluntary Liquidation (MVL) is often the most beneficial solution. An MVL can be used to close a company efficiently. Keeping tax expenditure low and ensuring a company retains as much of its profits as possible.
In this article, we will break down the Members’ Voluntary Liquidation tax implications, the broader MVL process, and give you an overview of what the process can help you save.
(It should be noted that Clarke Bell are not tax experts. We recommend that you speak to your accountant and/or a tax specialist regarding what taxes apply to you and your company.)
What is an MVL?
An MVL is a formal process that directors can use to close a solvent company. To be eligible, your company must be able to pay its debts and other liabilities in 12 months. These liabilities include any other financial obligation, such as unpaid invoices or tax.
If it cannot pay these, then your company will be considered insolvent. Meaning you must look for alternative methods of closing…such as the above-mentioned CVL process.
Initiating the MVL process
When initiating the MVL process, you must complete a few steps. First, you must ensure that the majority of directors agree with the decision to close the company. Then, you need to appoint an insolvency practitioner. Their job will be to liquidate your company. Ensuring that it is closed within the limits of the law and insolvency rules. They will also uphold your obligations to any creditors, handling the distribution of funds realised from the liquidation of your company.
A key thing in the MVL process is that directors need to swear a ’declaration of solvency’ in front of a solicitor – this can be done either face-to-face or remotely. A declaration of solvency is a document that confirms your company is solvent to the best of your knowledge. In addition to your signed declaration, you will include a list of your company’s assets and liabilities. It is important that the declaration of solvency is truthful, as you risk considerable penalties if you have knowingly signed it falsely, such as hefty fines and even a prison sentence.
How does the MVL process work?
Your appointed insolvency practitioner will begin by contacting HMRC and Companies House, notifying them of your decision. They will then post a notice in the Gazette, which essentially takes your intention public. If any related party takes issue with the closing of your company, they can petition to have it blocked. This is not usually an issue for solvent companies, as most obstructions to a company’s liquidation come from the creditors of an insolvent company attempting to close.
Once the notices in the Gazette have elapsed without anyone coming forward to stake a claim, the liquidation process can begin. Your appointed insolvency practitioner will collect any outstanding payments made out to your company, assuming you haven’t done so already. Next, they will liquidate company assets and transfer company accounts to a dedicated client account.
With the liquidation complete, your insolvency practitioner will notify HMRC that your company’s assets have been liquidated. HMRC will check to ensure this is so, and that you have settled all outstanding debts. Assuming your company has no more liabilities, shareholders can receive the rest of the money. This marks the end of the process, with the company being struck off after three months.
Also Read: What is a Signed Indemnity in an MVL? Understanding the Process
Members’ Voluntary Liquidation tax advantages
Using an MVL provides companies with significant tax advantages. First and foremost, all profits realised from the liquidation of the company are treated as Capital Gains, rather than incomes. This means they are taxed under the lesser Capital Gains tax rates. Compared to the relatively high income tax rates applied to dividends.
Another perk to Capital Gains is that your profits are eligible for other reliefs. For example, shareholders could apply for Business Asset Disposal Relief, which would further reduce the Capital Gains tax rate applied to these profits. For this particular relief, we go into more detail below.
Business Asset Disposal Relief
Business Asset Disposal Relief, formerly known as Entrepreneurs Relief, can reduce the Capital Gains tax rate from 20% to 10%. This relief has a lifetime limit of £1 million, and is open to shareholders disposing of shares when they hold at least 5% of the company’s voting rights for a minimum of two years. Compared to the higher income tax rates with few opportunities to reduce it, this relief can dramatically reduce the tax costs of liquidating your company.
Even if you are not eligible for Business Asset Disposal Relief, the tax benefits for using an MVL are still not to be passed up.
Clarke Bell can help
If you are considering closing your company using a Members’ Voluntary Liquidation, then Clarke Bell can help you.
We have over 28 years of experience in closing companies and have put more than 2,800 successfully through the MVL process. We can use this experience to help you close your company in the most effective way.
Contact our experts today to find out what we can do for you.
