Members’ Voluntary Liquidation (MVL) is a formal process that winds-up a solvent company, consequently freeing up funds and realising its assets.
Unlike with other forms of liquidation, such as Creditors’ Voluntary Liquidation and Compulsory Liquidation, it is a voluntary process that is only available to companies that are solvent.
There are many reasons a director might choose to close a company through an MVL and it is a route that has several advantages.
In this guide, Clarke Bell outlines the main benefits of Members’ Voluntary Liquidation, to help you decide whether this is the best path for you in 2021.
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Members’ Voluntary Liquidation defined
Let’s start by looking at what Members’ Voluntary Liquidation is and what the process involves.
An MVL is a legal process that winds-up a solvent company. Only companies that are solvent can undergo this process – and an MVL is typically used when a company’s assets are over £25,000.
This is completely voluntary meaning it can be entered into whenever the director decides.
As a formal, legal process, a licensed Insolvency Practitioner must be appointed to carry out and oversee the liquidation.
The outcome of the MVL will be that the company closes and ceases to trade, its assets are distributed to the company’s shareholders and funds freed up.
As we have mentioned there are also other types of voluntary liquidation including Creditors’ Voluntary Liquidation (CVL), as well as compulsory forms of liquidation, namely Compulsory Liquidation in which a company is forced to close.
MVL vs CVL
Although both Members’ Voluntary Liquidation and Creditors’ Voluntary Liquidation are both voluntary forms of liquidation, the key difference between the two is that whereas an MVL is only available to solvent companies, a CVL is only available to insolvent companies.
A CVL occurs when a company can no longer afford to cover its daily costs or repay its debts. The company will enter into Creditors’ Voluntary Liquidation which will close the company and pay back creditors what they are owed.
The final form of liquidation is compulsory liquidation. Unlike an MVL and CVL, this is not a voluntary process and is forced upon the company.
This is initiated by creditors who are owed money and have had several repayment demands gone unfulfilled. The creditors will issue a winding-up petition to the court. If successful, the court will appoint an Insolvency Practitioner to liquidate the company.
As it sounds, this is the most serious form of liquidation.
How does an MVL work?
To initiate the process of an MVL, the company director has to first call a meeting with shareholders. 75% of shareholders must agree in order for the MVL to progress.
Next, the company director must make a Declaration of Solvency which proves that the company is:
- Solvent and can pay its bills and cover its daily costs
- Can pay all its creditors
- Can pay all its taxes
- Can meet any contractual obligations
An Insolvency Practitioner must then be appointed to oversee and carry out the liquidation process.
What are the benefits of an MVL?
That’s how Members’ Voluntary Liquidation works, so what are the benefits of this option?
One advantage of an MVL is that it allows a director to close their business and free up funds. This can be useful for directors that are looking to retire, move abroad or no longer have a use for the business.
Perhaps the main advantage of closing a business through Members’ Voluntary Liquidation however is that it lets the director close the company in a tax-efficient manner.
This is owing to the fact that any funds taken out of the business through an MVL are subject to Capital Gains Tax (set at 10%) rather than Income Tax (set at 18% at the basic level or 28% at the higher level.)
Further to this, there are extra tax benefits to those that qualify for Business Asset Disposal Relief, otherwise known as Entrepreneurs’ Relief until 6th April 2020.
Here, a director can sell all or part of their company and pay just 10% in Capital Gains Tax on profits over the lifetime of the business with a cap of £1 million.
This is great news for directors as it can save them a significant sum on their tax bill and is one reason that many choose this route.
To qualify for Business Asset Disposal Relief the following criteria must apply for at least 2 years up to the date you sell the business:
- You must be a sole trader, business partner or employee of the company.
- You must have held 5% or more of the share capital of the company and 5% of voting share capital. This must have been true for at least 12 months
- You must have owned the business for at least 2 years
You can calculate how much you will save through Business Asset Disposal Relief by following these simple steps:
- Calculate your total taxable gain by adding together all your capital gains, taking away your losses
- Take away your tax-free capital gains allowance, this is £12,000 for individuals
- You will be left with a figure which you can deduct 10% off which you will pay in tax
Considering Members’ Voluntary Liquidation?
Let Clarke Bell help you with the next steps
If you are considering selling your solvent business in 2021, Clarke Bell’s professional insolvency team is here to help ensure you.
We will work closely with your business to ensure you get the best possible outcome from the MVL. We have a range of categories for our Members’ Voluntary Liquidation, so we can help close down your solvent company whatever your situation.