What is the process of a Members’ Voluntary Liquidation (MVL)?
A Members’ Voluntary Liquidation (MVL) is a formal procedure for winding up a solvent company in a cost-effective manner. MVLs are commonly used as a tax-efficient strategy for exiting a profitable company, particularly when the company has fulfilled its purpose or when shareholders and/or directors want to leave the business and withdraw their investment profits.
Are Members’ Voluntary Liquidations a tax-efficient means of business closure?
Members’ Voluntary Liquidations (MVLs) offer a highly tax-efficient method for winding up a solvent company and withdrawing its profits. When a company is closed through an MVL, all retained profits are considered capital rather than income, resulting in taxation under Capital Gains Tax (CGT).
This means that funds distributed to shareholders are subject to CGT rather than income tax, which is generally a more advantageous option compared to receiving dividends. It’s this tax advantage that makes MVLs particularly appealing, especially when substantial amounts of retained profits are at stake.
What other options exist besides an MVL?
While Members’ Voluntary Liquidations (MVLs) can be advantageous for closing a solvent company in a tax-efficient manner, they may not be suitable for every business.
Firstly, to qualify for an MVL, the company must be solvent, meaning it can settle all its debts (plus statutory interest) within 12 months of the liquidation’s start. If your company can’t repay its debts within this timeframe, it’s insolvent, and you’ll need to explore other closure options like a Creditors’ Voluntary Liquidation (CVL).
Secondly, for companies with retained profits exceeding £25,000, an MVL is often financially wise and tax-efficient for extracting proceeds from an unnecessary business. However, if your business has limited assets or cash, dissolving the company might be a preferable alternative to an MVL.
Members’ Voluntary Liquidation (MVL) vs Dissolving a Company
Dissolving a company also referred to as ‘striking off’, is a relatively straightforward process initiated by applying to Companies House to remove the company’s name from the register. While it may seem like a feasible alternative to an MVL in some cases, striking off may not be suitable for every situation.
Once a company is dissolved, any remaining assets become ‘bona vacantia’, automatically transferring ownership to the Crown. To reclaim these assets, you’ll need to pay to reverse the striking-off and restore the company to the register. Therefore, it’s strongly advised to extract all assets from the company before starting the striking-off process, but only after settling all liabilities.
As a rule of thumb, if you have more than £25,000 to distribute, opting for an MVL is likely to be more beneficial due to its tax-efficient advantages.
What is the expense associated with an MVL?
MVLs typically incur higher costs compared to striking off, mainly because they involve a licensed insolvency practitioner. However, if your company has substantial funds to distribute, the expense of an MVL might be balanced by the tax savings achievable through this method of extracting business assets.
If your company’s affairs are complex, it’s crucial to work with someone trustworthy when closing it down. Trying to strike off the company independently or opting for the cheapest MVL provider can be risky, especially when significant sums are involved.
An experienced insolvency practitioner can ensure your company’s closure is handled appropriately and cost-effectively. Real Business Rescue offers a partner-led service for all liquidations, ensuring personalised attention and continuous support throughout the liquidation process.
What are disbursements in a Members’ Voluntary Liquidation (MVL)?
The primary expense of entering into a Members’ Voluntary Liquidation is the fee levied by the insolvency practitioner handling the process. However, there are additional smaller costs, known as disbursements, which you’ll need to cover. These mainly entail the expenses associated with legal notices that we are obliged to publish on behalf of your company.
These include three advertisements in the Gazette, which we charge at cost. Additionally, you’ll need to pay a bond, offering you protection while the company’s funds are under the control of the insolvency practitioner. The bond amount varies based on the company’s asset value and the bond provider, typically ranging from around £40 for smaller MVLs to over £600 for companies distributing several million pounds.
What exactly is Business Asset Disposal Relief, previously known as Entrepreneurs’ Relief (ER), and am I eligible for it?
Members’ Voluntary Liquidations offer an additional tax-efficient benefit through Business Asset Disposal Relief. When you sell, gift, or close your business, you might be eligible for Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief), a tax relief program aimed at lowering your tax rate. If you qualify for this relief, you’ll be subject to a flat Capital Gains Tax (CGT) rate of 10% on qualifying gains, up to a lifetime limit of £1 million.
“What is the duration of an MVL, and how soon do shareholders receive their payments?”
In straightforward cases with no outstanding liabilities, the MVL process typically concludes and the company is formally closed within 6 months. However, shareholders may receive a distribution before this period, depending on the company’s assets and funds. This distribution is facilitated through a signed indemnity, allowing the majority of funds to be swiftly paid out to shareholders while the liquidation process is ongoing. The indemnity offers protection in case any previously unknown creditor claims arise after distributions are made.
A portion of funds will be held back by the insolvency practitioner until the company is officially closed. The agreed-upon fee for placing the company into Members’ Voluntary Liquidation, along with disbursements, will be retained by the liquidator. Any remaining funds will then be distributed among the shareholders upon HMRC approval at the conclusion of the process.
What is the distribution of species in an MVL?
When assets are not readily convertible into cash, or when there’s a preference for a physical transfer of goods, it’s termed as a distribution in kind or an in-specie distribution. In specie distributions commonly involve property or land, although equipment and stock are also frequently handled this way.
Physical assets distributed in species undergo independent assessment to assign them a monetary value. This valuation facilitates the appropriate taxation and ensures that other shareholders receive a fair distribution amount, considering these assets.
What steps should I take to prepare my company for entering into a Members’ Voluntary Liquidation (MVL)?
If you’re considering placing your company into an MVL, it’s important to take preparatory steps to streamline the process. Organising your affairs beforehand is strongly recommended to ensure your company qualifies for this procedure and to simplify the process.
Ensure all liabilities are settled, chase and collect outstanding debts, and ensure all HMRC obligations, including accounts submission, are up to date. It’s also advisable to deregister for VAT and as an employee once you cease trading. Unpaid creditor claims, including those owed to HMRC, will accrue statutory interest at a rate of 8% once the company is in liquidation, so settling all financial obligations before commencing the MVL is highly recommended.
Planning an MVL in advance with an insolvency practitioner and your accountant allows for optimal closure conditions. Consultation with an insolvency practitioner during the planning stages ensures a smoother process once the MVL officially begins.
The timeline for a Members’ Voluntary Liquidation (MVL)
i. Signing a Declaration of Solvency
Since MVLs are exclusively for solvent companies, you’ll need to sign a sworn declaration of solvency once the process begins. This declaration affirms that your company can settle all its liabilities within a 12-month period. It’s based on a thorough assessment of the company’s balance sheets and financial position to confirm that surplus funds will remain after clearing any liabilities. Falsely declaring solvency while knowingly insolvent is a criminal offence and could lead to fines and/or imprisonment for up to two years upon conviction.
Additionally, you’ll be required to sign a letter of engagement, formally appointing us as the liquidators of your company. A General Meeting of shareholders will then be convened, and if 75% of shareholders agree to the MVL, the company will enter liquidation, and the appointed insolvency practitioner will assume control of the company’s affairs.
ii. The Liquidation Process Starts
Once the liquidation process commences, we will inform HMRC and Companies House and submit the necessary documents. Your intention to close your company via an MVL will be publicized in the Gazette, becoming a matter of public record. However, since an MVL is intended for solvent companies, it’s unlikely to negatively affect your reputation moving forward. At this stage, any outstanding creditors are invited to submit claims for any owed monies.
iii. Capital Distributions Are Made
Once HMRC confirms that there are no outstanding liabilities and any remaining outstanding debts are settled, the company’s funds will be distributed among shareholders. If an indemnity has been signed and funds already released, this stage will involve the payout of any final funds that may have been retained by the insolvency practitioner. Subsequently, the company will be dissolved and removed from the Companies House register after a 3-month period.
What is a Section 110 Scheme of Arrangement MVL?
Members’ Voluntary Liquidations are commonly employed as an exit strategy, especially when directors and shareholders opt to retire or pursue new ventures. However, MVLs are also frequently chosen by companies with intricate corporate structures undergoing business simplification or restructuring, permitted under Section 110 of the Insolvency Act 1986.
Limited companies within a larger group can be closed down, with their assets transferred to other parts of the business. Alternatively, shares in companies can be distributed to individual shareholders, often used in cases of disputes or divorce proceedings. When an MVL is employed in this manner to facilitate a demerger or divide a company, it’s sometimes termed as a ‘restructuring MVL’.
Comprehending Targeted Anti-Avoidance Rule (TAAR)
The Finance Bill 2016 introduced new legislation to prevent companies from being wound up through an MVL solely to exploit tax advantages, only for shareholders to establish a new company and continue trading in the same or similar area. This legislation, known as the Targeted Anti-Avoidance Rule (TAAR), aims to address such practices.
If HMRC suspects that your choice to opt for an MVL was primarily to gain a tax advantage by avoiding tax on dividends, rather than genuinely winding up the company, you may be subject to the legislation. In such cases, you might be required to pay tax on the distribution as income rather than capital.
The criteria for TAAR are not precisely defined, but consulting with your appointed insolvency practitioner can help determine whether you qualify for an MVL or if you might be affected by these regulations.
Moneyboxing and MVLs
Another area of caution involves the regulations regarding a practice known as moneyboxing. Moneyboxing occurs when a company is believed to be retaining excessive profits within the business to obtain a tax advantage when the company is eventually closed through an MVL.
Similar to TAAR guidelines, the rules surrounding moneyboxing are contentious. There’s no precise definition of what level of funds constitutes as ‘excessive’. As a result, companies needing a larger amount of working capital or those exercising caution to maintain healthy cash flow might unintentionally breach these rules.
Before proceeding with an MVL, it’s important to discuss any concerns about moneyboxing or TAAR with your accountant and/or insolvency practitioner to ensure compliance with these pieces of legislation.
Read More:
- What are Contingent Liabilities
- What is Business Asset Disposal Relief in an MVL
- Solvent Liquidation: Advice for Shareholders and Directors
- What is a Distribution in Specie
- How much does a Members’ Voluntary Liquidation cost
How to start the Members’ Voluntary Liquidation process
If you’re contemplating closing your solvent company through an MVL, it’s crucial to seek expert advice from a licensed insolvency practitioner. With over 100 licensed insolvency practitioners operating across 100+ offices throughout the UK, we’re well-equipped to help you initiate the liquidation process, regardless of your location. Contact our expert team today to schedule a free, no-obligation consultation.
Frequently Asked Questions
1. Can an insolvent company enter an MVL?
Members’ Voluntary Liquidation is specifically designed for solvent companies. It necessitates a formal written declaration from company directors affirming the company’s ability to settle all its debts, including taxes and potential liabilities.
If directors proceed with an MVL and the company is later found to be insolvent, the process shifts to a Creditors’ Voluntary Liquidation (CVL). This can lead to severe consequences for directors, including potential investigations by the Insolvency Service.
Directors are obligated to act in the creditors’ best interests upon insolvency, which involves ceasing trade to prevent further financial losses. Failure to do so could result in disqualification for directors for up to 15 years.
2. Differences between MVL and dissolution?
MVL and dissolution serve as means to close a solvent company, yet they differ significantly.
Members’ Voluntary Liquidation is a formal process overseen by a licensed insolvency practitioner (IP), requiring a minimum of 75% of members to vote in favour for its execution.
Conversely, directors can initiate dissolution themselves without professional involvement, also known as company strike-off, offering a cost-effective closure option.
While MVL incurs professional fees and is comparatively more expensive, its tax-efficient nature makes it particularly suitable for companies with over £25,000 of retained profits. Distributions are taxed as capital rather than income at this level, with eligible individuals benefitting from Business Asset Disposal Relief (BADR), further reducing tax liability to a rate of 10%.
3. Is an MVL a tax-efficient way to close a company?
MVL is typically advised for companies with retained profits exceeding £25,000. This voluntary solvent liquidation proves highly tax-efficient, as profits are taxed as capital gains rather than income.
This significantly reduces shareholders’ tax liabilities, which can be further mitigated to an effective rate of 10% on gains up to a £1 million lifetime allowance through the use of Business Asset Disposal Relief, or BADR.
The tax-efficient nature of Members’ Voluntary Liquidation enables directors to maximise distributions upon business closure. In contrast, if dissolution is chosen as the closure method, profits would be subject to income tax rather than capital gains tax.
4. Why would you liquidate a solvent company?
Solvent companies undergo liquidation for diverse reasons. For instance, if a sole director is nearing retirement and there’s no successor for the business, liquidation facilitates the tax-efficient distribution of retained profits.
At times, solvent companies are liquidated because they’ve fulfilled their purpose and the director(s) wish to pursue other ventures or employment opportunities.
Moreover, larger corporations may opt for solvent liquidation to streamline operations or reduce costs, finding it an effective method of closure. MVL proves highly advantageous in many cases owing to the favourable tax rates on distributions.
I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.