What is a Members' Voluntary Liquidation?
Posted on 23rd January 2020
There are many reasons why a director might decide to close down their limited company. The director may decide that it is time to retire, or, if they are contracting through their limited company, they may have come across a permanent job opportunity. Unfortunately, it may be the only option to close a company when it is struggling to make a profit, and this is another reason why one might close.
When a company is struggling, it can enter voluntary liquidation which is essentially when all the company’s assets are sold and the funds are distributed. The company can then be struck off the company register and finally dissolved. However, liquidation should only be considered as a last resort after all other avenues have been explored.
Members’ Voluntary Liquidation specifically is when a limited company is solvent – i.e. its assets exceed its liabilities – and the shareholders wish to extract its profits as a capital distribution. This results in formal liquidation of the company.
What is a Members’ Voluntary Liquidation?
Often abbreviated to MVL, this is the process whereby shareholders appoint a liquidator to officially close down a solvent business i.e. a business that is able to pay its debts. There are a number of different reasons why you may want to opt for Members’ Voluntary Liquidation. This could be because you do not want to run the company any more, or you want to step down from a family business and there is not anyone else who wishes to run it. You may simply wish to retire.
Of course, there are a number of different ways you can go about rectifying the situation you find yourself in, for example, you may decide to try and find a buyer for your business instead.
While this is a viable solution, there are a number of benefits to gain by opting to use a Members’ Voluntary Liquidation.
Typically, the bulk of work required for a Members’ Voluntary Liquidation can be achieved in just seven days. Before a Members’ Voluntary Liquidation can be begin, you (or your accountant!) will need to conduct some work. This can include lowering the cost of liquidation and simplifying the financial affairs of your business. Nevertheless, once the directors are ready to liquidate, the paperwork can be prepared and you can go into liquidation straight away.
Another reason why a lot of people prefer to opt for a Members’ Voluntary Liquidation is because there will be no more Companies House filing deadlines and the business will be brought to a neat end. When a company is in Members’ Voluntary Liquidation, all of the filing deadlines and penalties end. This is a good way to take the pressure off your company if you find that your accounts are frequently being filed late.
This is another advantage but you do need to be aware of the fact that a statutory declaration must be signed in order to state that the business is solvent. There are a lot of directors, especially those who are retired, who would prefer the liquidation of the business so that the company can be struck off and there is distance between them and the business on any sort of problems that may have occurred in the past, for example, contingency claims made on construction work.
There are also a number of tax benefits that are associated with using a Members’ Voluntary Liquidation. In fact, tax savings are the main reason company directors choose to go down this route. Funds that are taken out of a limited business as dividends will be taxed as income under different rates, which can be as high as 38.1%. However, funds that are taken as capital will typically be as low as 10%. In addition, there will be an allowance on yearly Capital Gains Tax per shareholder.
Seek expert advice regarding Members’ Voluntary Liquidation
There are a number of different reasons why people opt for a Members’ Voluntary Liquidation, and one of the key benefits is the tax savings that can be made. Nevertheless, we still strongly advise you to take tax advice from an accountant. This is because there are a number of different tax considerations that will need to be discussed.
Your company may be eligible for Entrepreneurs’ Relief, for instance. This is a type of tax relief that individuals receive so that the lowest Capital Gains Tax rate (i.e. 10%) is paid on asset sales, which includes shares in a qualifying trading business. In order to quality for this type of tax relief, you need to have been active in the trade profession. While holiday letting does typically count as trading, holding a buy-to-let property does not. If your business does not count as having traded, the rate of Capital Gains Tax that is due is usually 20%.
This is just one of the important considerations. There is also a lifetime tax limit, which is £10m per shareholder. This applies to each individual. In order to be deemed a shareholder, you must either be a director or a working employee. A director should be registered at Companies House. An employee must have been paid a salary or wage and they must have worked and put in the hours. Moreover, a shareholder must own a minimum of five per cent of the voting shares for the past year. This is the ordinary and voting shares in the business. They can also incorporate shares that have been allocated under an Enterprise Management Incentive Scheme.
There are some things you need to watch out for...
There are a number of different problems that can arise with Members’ Voluntary Liquidation, and so it is important to be aware of these.
Strictly speaking, the Crown, essentially the HM Government, has ownership of any dissolved assets. This is why it is important that you or your accountants do not close a case until you have had any VAT or tax refunded. If required, you could restore a business that has been liquidated on a Court application to the Companies House register. Needless to say, it’s only worth going down this route if you discover an asset that is worth enough money to do so as it can take some time!
Sometimes, there is a delay in the tax clearance required from HMRC and this can be an issue for shareholders. After all, a timetable for HMRC cannot be set. Sometimes they will take a little bit longer because they are very thorough before a tax refund is given out. Because of this, we advise that shareholders should not rely on a refund coming in by a specific date.
There have been a number of different cases where all of the shareholders could not be found. Typically, this could occur in an older business whereby various family members have inherited shares and they cannot be tracked down. A possible solution to this is to deposit funds with a solicitor with their share in order to track them down – we can help with this. Ultimately, the funds are going to belong to the Crown if the individual cannot be found in the end.
Last but not least, one of the biggest issues with MVL is that at the beginning of the process, the directors will swear on-oath that the business is solvent and has the ability to pay all creditors within a year from the liquidation date. You will need to move to a Creditors Voluntary Liquidation if you are unable to do so. This will increase the costs by a considerable degree and you may need a new liquidator. If the directors know that this was likely to happen, they may have committed a criminal offence. This could result in a fine, a prison sentence, or both.
If you are considering Members’ Voluntary Liquidation, why not give us a call or drop us an email? We’ll be more than happy to help advise you, taking your individual circumstances into consideration. We’ll explain your options in simple, understandable terms, and help you come to an informed decision based on your specific situation.
Nicola J Sorrell -
Founder | Xero Champion | IR35 Expert
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