Members’ Voluntary Liquidation – A guide to liquidating a solvent company
A Members’ Voluntary Liquidation (MVL) is a formal process for bringing the life of a limited company to an end and distributing the remaining assets to shareholders in the most tax efficient way. This can be done for reasons of retirement, an intractable shareholder dispute or simply because the company is no longer needed. The company must be solvent – i.e. it can afford to pay all of its creditors including any tax becoming due and still have funds left for the shareholders.
Following the withdrawal of Extra Statutory Concession C16 (“ESC 16”) if a limited company has served its purpose and has funds or assets in excess of £25,000, a formal MVL process will be required to close the company down.
What is the benefit of liquidating a solvent company?
The main advantage of a Members’ Voluntary Liquidation (MVL) is that it can be a tax efficient way of extracting the remaining funds from a company. This is because distributions made out of an MVL are treated as capital receipts rather than income, and are therefore subject to capital gains tax rather than income tax. This is likely to be beneficial if Entrepreneurs’ Relief is available with a marginal tax charge of 10%.
The procedure can happen immediately following the cessation of trade; whilst the MVL is initiated by the Director/s of the company, it will still require 75% of shareholders to pass the winding up resolution.
How to take a company into an MVL
There are 6 key steps involved in taking a company into a Members’ Voluntary Liquidation:
|Step 1||The company discusses matters with an Insolvency Practitioner.|
|Step 2||The company holds a Board meeting to confirm its decision to proceed with a solvent liquidation.|
|Step 3||The directors swear a Declaration of Solvency. This declaration needs to be sworn in front of a solicitor and is filed at Companies House. The declaration briefly outlines the company’s assets and liabilities and confirms that the company can pay all of its liabilities (with interest) within 12 months.|
|Step 4||A General Meeting of the shareholders is convened in order to pass resolutions to wind the company up and appoint a liquidator. This can also be done by written resolutions.|
|Step 5||Final accounts and tax returns are prepared, and all remaining liabilities paid, including VAT and Corporation Tax, so clearance can be obtained from HMRC.|
|Step 6||Once the liquidator has been appointed, they will deal with the statutory filing of documents and publication of required notices. In addition, they will dispose of any company assets either by sale to a third party or a distribution in specie directly to the shareholders. These distributions are treated as via capital not dividends. Similarly, they will realise all other assets and after paying any remaining liabilities and costs of the MVL, these funds will be distributed to the shareholders.|
If the Liquidator forms the opinion during the MVL process that the company is insolvent, as it will be unable to pay its liabilities in full, as stated in the Declaration of Solvency, then they will need to call a meeting of creditors and take the company into a Creditors’ Voluntary Liquidation (CVL).
Changes from April 2016
In April 2016 a new Targeted Anti-Avoidance Rule (TAAR) was introduced relating to ‘transactions in securities’, which can apply in a number of circumstances where transactions result in a tax advantage, including where income has effectively been converted into capital for tax purposes. If these rules apply, the amount in question will be treated as income for tax purposes. HMRC currently accept, however, that these rules do not apply in the case of a straightforward liquidation involving the winding up of a business which ceases or is taken over by another concern under substantially different control.
The new rules mean that, where an MVL is carried out after 5 April 2016, a significant tax saving will no longer be available if the shareholders start to carry on a similar activity within two years of the distribution. Although the new rules limit circumstances in which an MVL can be used advantageously, in some ways the new rules are helpful as it is clear that anti-avoidance legislation will not be applied in the case of straightforward liquidation, provided that the shareholders do not recommence any similar activities within a two year period.
Shareholders should firstly seek advice from their accountant in calculating the likely tax benefit of an MVL, but typically it will be a benefit where the funds available for distribution are £25,000 or more. Even though the company is solvent, an MVL can only be completed by using a licensed Insolvency Practitioner. Bridgewood have an expert team who have assisted many companies through the MVL process at a very competitive fee and work alongside many accountants to provide extra support to their clients.
If you would like more information about MVLs, or have a client who may need our services, please don’t hesitate to contact me on 0115 871 2921 or by email email@example.com.
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