When it comes to closing down your limited company you may be concerned about how to close it down in the most tax-efficient way. A Members Voluntary Liquidation (MVL) could be the right option for you and it involves distributing remaining profits as capital to shareholders.
What is a Members Voluntary Liquidation?
Once a profitable company (with retained profits of around £25,000 or more) has reached the end of its operational life, the directors or shareholders may wish to extract the profits. A Members Voluntary Liquidation (MVL) is a tax-efficient way of closing down a solvent business and distributing the company’s assets in good time.
This option is not available for all companies, so you should speak to your accountant to determine what is best for you.
Why would a company be placed into a Members Voluntary Liquidation?
A company could be placed into an MVL because the company is no longer trading. This could be due to the shareholders or directors wanting to retire, the company may no longer be able to trade because of IR35, or the need to re-order a group of companies when a subsidiary company is dormant or no longer required. An MVL may also be appropriate for companies with more than one shareholder or director who want to divide up the company’s assets between them.
What are the tax benefits associated with a Members Voluntary Liquidation?
The main tax advantage associated with liquidating your limited company via an MVL is that the shareholder distributions are treated as capital distributions. This could mean more money for shareholders, as the assets extracted from the company are subject to Capital Gains Tax instead of Income Tax. Each shareholder or director has an individual Capital Gains Allowance of £12,000 which is tax-free (for the tax year 2019/20) and anything after this is subject to 18% or 28% Capital Gains Tax, depending on the tax-band the gains fall within.
In addition to this, the asset distributions from your limited company may be subject to Entrepreneurs Relief – if you fulfil certain criteria such as holding more than 5% shares and have been trading for 24 months. Entrepreneurs Relief is available to individuals or business partners selling their businesses, and the relief means that you will pay fewer Capital Gains Tax (10% on qualifying assets) when you dispose of your business in the qualifying tax year.
HMRC targeted anti-avoidance
The Targeted Anti-Avoidance Rule (TAAR) was introduced by HMRC in April 2016 which targets shareholders of “close companies”. TAAR was introduced to prevent individuals from setting up a new business immediately after liquidating an existing one.
As of April 2016, if you received a distribution from a company that closed via an MVL you will need to be aware of TAAR. A distribution from a company winding-up to an individual will be subject to Income Tax where the following conditions are met:
- If an individual has at least 5% interest in the company immediately before the winding-up
- If the company was a close company at any time during the two years before the winding-up date or at the date of winding up
- If two years after the distribution the individual continues to be involved in a similar trade or activity
- The circumstances surrounding the winding-up has the main purpose or one of the main purposes is the avoidance or reduction of Income Tax
What is the process for a Members Voluntary Liquidation?
Before placing your company into an MVL you should ensure all your company’s liabilities are paid, all payments in and out of your business bank account are finished and all accounts are up to date and submitted to HMRC.
To begin the MVL process you must sign a Declaration of Solvency where you agree to settle all the company’s remaining liabilities in full within 12 months. Falsely signing a Declaration of Insolvency is illegal and could result in a fine or two years imprisonment.
You will also need to appoint a liquidator who will require you to sign a letter of engagement.
As long as 75% of shareholders or directors agree to the MVL then the insolvency practitioner will enter the company into liquidation and take control of the company’s affairs.
The liquidation process includes:
- An advertisement in the Gazette of the intention to close the company
- Notifying and submitting the relevant documents to Companies House and HMRC
- Creditors submitting claims for any outstanding money owed
Once HMRC is satisfied that all liabilities and taxes have been paid the remaining company funds can be distributed accordingly.
How long does a Members Voluntary Liquidation take?
If a company has no outstanding liabilities the MVL process is relatively straightforward to complete and the company can expect to be formally closed within 6-9 months. However, the shareholders or directors will often receive the first distribution of the funds (90-95%) within 6-9 weeks of starting the process. This is done via a signed indemnity which allows the majority of funds to be paid out whilst the company is still going through the liquidation process.
The remainder of the funds will be held back by the insolvency practitioner until the company has officially been closed. After the insolvency practitioners fees have been deducted, any remaining funds will be distributed amongst the shareholders or directors once the liquidator gets approval from HMRC. The remaining funds will be distributed once the insolvency practitioner has been given clearance from HMRC that all the company’s taxes have been paid. This can normally take around 6-7 months from the start of the process.
How much does a Members Voluntary Liquidation cost?
MVLs are more expensive than ‘striking off’ due to the involvement of a licensed insolvency practitioner. The overall fee will depend on the complexity of the case but fees usually start around £3,000+VAT.
Due to the complexity and intricacies of closing down a profitable business, it is advised that you use an insolvency practitioner that has a good reputation and is knowledgeable. Likewise, if your business has complex affairs or holds large funds you want to be sure you can rely on the insolvency practitioner to handle it correctly and close your company down in the most tax-efficient way.
An MVL is not suitable for every company and you should seek advice from your accountant before beginning proceedings for closing down your limited company.
Churchill Knight can make closing down your limited company stress-free
Churchill Knight & Associates Ltd is partnered with ARC Insolvency, who offers a high-quality MVL service. ARC Insolvency makes the whole process of an MVL as straightforward and stress-free as possible. They will tailor the MVL process to your company to ensure you close your company down in the most tax-efficient way. As part of our MVL service, Churchill Knight clients will benefit from a free personal tax return in the tax year of the first distribution.
Visit our website for more information on our accountancy and payroll services. Alternatively, you can give us a call on 01707 871622 and one of our friendly team will be happy to go through it with you.