What is the process of a Members' Voluntary Liquidation (MVL)?
A Members’ Voluntary Liquidation (MVL) is a formal process for closing down a solvent company in a cost-effective way. MVLs are often utilised as a tax-efficient exit planning tool when a profitable company has either reached the end of its useful life, where shareholders and/or directors are looking to depart from the business and extract the profits of their investment.
While MVLs can be a great way for a solvent company to close in a tax-efficient manner, they are not suitable for every business.
Firstly, in order to be eligible for a Members' Voluntary Liquidation the company must be solvent – that means it must be able to settle its liabilities in full (plus statutory interest) within 12 months of the commencement of the liquidation. If your company cannot repay its debts within this time frame then it is insolvent and you will need to consider an alternative closure method such as a Creditors’ Voluntary Liquidation (CVL).
Secondly, for a company with retained profits over £25,000, an MVL is often a financially prudent and tax-efficient way of extracting the proceeds from a business which is no longer required; however, if your business has relatively little in the way of assets or cash, you may wish to consider dissolving the company as an alternative to a Members' Voluntary Liquidation.
Members' Voluntary Liquidation (MVL) vs Dissolving a Company
Dissolving a company – also known as ‘striking off’ – is a relatively simple process which is actioned by applying to Companies House and asking them to remove the company's name from its register. In some instances it can be seen as a viable alternative to an MVL, however, striking off will not be suitable for every situation.
Once a company is dissolved, any assets remaining in the business will become 'bona vacantia', and ownership will automatically transfer to the Crown. In order to claim these assets back you will need to pay to reverse the strike off and have the company restored to the register. Due to this you are strongly advised to ensure you extract all assets from the company before you begin the strike off process but only once all liabilities have been paid in full.
As a guideline, if you have more than £25,000 to distribute, however, it is highly likely you would be better off opting for an MVL based on its tax-efficient advantages.
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Are MVLs a tax-efficient way to close a business?
MVLs are an extremely tax-efficient way to close a solvent company and extract the profits within it. Upon closure of a company by way of Members' Voluntary Liquidation, all retained profits are treated as capital rather than income and are taxed accordingly.
This means the funds distributed to shareholders are subject to Capital Gains Tax (CGT) rather than income tax, representing a considerably more favourable option than taking these funds as dividends in the vast majority of cases. It is this tax saving which makes MVLs so popular, particularly in instances where considerable sums of retained profits are involved.
How much does an MVL cost?
MVLs are a more expensive option than striking off due to the involvement of a licensed insolvency practitioner. However, if your company has a large amount of money to distribute, the cost of an MVL could well be offset by the tax savings you may be able to make by extracting the money tied up in the business using this process.
If the company’s affairs are complicated you need to know you are dealing with someone you can trust when bringing the company to a close. Attempting to strike off the company yourself, or using the cheapest MVL provider you can find, is never advised particularly when significant sums of money are involved.
A knowledgeable insolvency practitioner will be able to ensure your company is closed down in the most appropriate and cost-effective manner. Real Business Rescue offer a partner-led service for all liquidations meaning your company will be dealt with on an individual basis and you will always have a point of contact throughout the entire liquidation process.
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What are disbursements in a Members' Voluntary Liquidation (MVL)?
The main cost of entering into an Members' Voluntary Liquidation is the fee charged by the insolvency practitioner dealing with the liquidation. However, there are other smaller costs which you will also be required to pay; these are known as disbursements and mainly cover the cost of legal notices which we are required to take out on behalf of your company.
These include three adverts placed in the Gazette which we charge these at cost. You will also be required to pay a bond; this provides protection to you whilst the company’s funds are in the hands of the insolvency practitioner. The precise amount of this bond varies depending on the asset value of the company and the bond provider used, but it typically ranges from £40 in smaller MVLs to over £600 for companies with several million pounds to distribute.
What is Business Asset Disposal Relief - or Entrepreneurs’ Relief (ER) - and do I qualify?
Members' Voluntary Liquidations have another added tax-efficient advantage in the form of Business Asset Disposal Relief. When selling, giving away, or otherwise closing your business, you may be entitled to take advantage of Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief), a tax relief scheme designed to reduce the rate of tax you are liable for. If you qualify for ER, you will pay a flat CGT rate of 10% on qualifying gains up to a lifetime limit of £1 million.
How long does an MVL last and how quickly do shareholders get paid?
In straight forward cases where there are no outstanding liabilities, the MVL process is typically completed and the company formally closed within 6 months. However, a distribution will often be made to the shareholders before this time depending on the level of company assets and funds involved. This is done by way of a signed indemnity which will allow for the vast majority of funds to be paid out to shareholders almost immediately while the company is still going through the liquidation process. The indemnity provides protection in the event of previously unknown creditor claims being submitted following distributions being made.
A small amount will be held back by the insolvency practitioner until the company has been officially closed; the agreed fee for placing the company into Members' Voluntary Liquidation will be retained by the liquidator plus disbursements, and any remaining funds will be distributed amongst the shareholders at this concluding point following approval from HMRC.
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What is a distribution in specie in an MVL?
Where there are assets which are not easily converted into cash, or where a physical transfer of the goods is preferred, this is known as a distribution in kind or an in specie distribution. In specie distributions typically involve property or land, although equipment and stock is also frequently handled in this manner.
Physical assets being distributed in specie will be given a monetary value after being independently assessed which allows for the appropriate tax to be levied and also to ensure other shareholders receive a fair distribution amount which takes this into account.
How should I prepare my company for entering into a Members' Voluntary Liquidation (MVL)?
If you are considering placing your company into an MVL there are steps you can take to prepare your business for the process, and it is highly advised that you take the time to organise your affairs in such a way. Getting your company in as simple a state as possible before commencing the MVL helps make the process much simpler and also ensures your company definitely qualifies for this type of procedure.
You should ensure liabilities are paid, your debtor book is chased and collected, and all HMRC obligations including the submission of accounts are up to date. You are also advised to deregister for VAT and as an employee once you cease trading. Unpaid creditor claims, including money owed to HMRC, will accrue statutory interest at a rate of 8% once the company is in liquidation so it is highly advised you settle all financial obligations prior to commencing the MVL.
A Members' Voluntary Liquidation can be planned in advance with both an insolvency practitioner and your accountant but not actioned until you are ready and the company is in its optimum condition to be closed. With this in mind you are advised to consult an insolvency practitioner during the planning stages to ensure a swifter conclusion once the MVL process officially begins.
Timeline for an MVL
Signing a Declaration of Solvency
As MVLs are designed for solvent companies only and you will be required to sign a sworn declaration of solvency once the process begins, attesting to the fact that your company is able to settle its liabilities in full within a 12 month period. This will be done after a thorough assessment of the company’s balance sheets and financial position to confirm that there will be surplus funds remaining in the business once its liabilities (if any) are cleared. Falsely signing a declaration of solvency when knowingly insolvent is an offence and, if convicted, could result in a fine and/or up to two years imprisonment.
You will also be asked to sign a letter of engagement which formally appoints us to act as liquidators of your company. A General Meeting of shareholders will be held and, as long as the MVL is agreed to by 75% of shareholders, the company will enter liquidation and the appointed insolvency practitioner will take control of the company’s affairs.
The Liquidation Process Begins
Once the liquidation process begins we will notify HMRC and Companies House and submit the relevant documents. At this stage your intention to close your company through an MVL will be advertised in the Gazette, making it a matter of public record; however, as an MVL is a procedure for a solvent company, it is unlikely to cause you reputational damage going forward. Outstanding creditors are invited to submit claims for any monies owed at this stage.
Capital Distributions Are Made
Following clearance from HMRC that there are no outstanding liabilities, and payment of any additional outstanding liabilities, the company’s funds will be distributed amongst shareholders. If an indemnity has been signed and funds already released, then this stage will involve the pay out of any final funds which may have been retained by the insolvency practitioner. The company will then be dissolved and removed from the Companies House register after 3 months.
What is a Section 110 Scheme of Arrangement MVL?
Often Members' Voluntary Liquidations are utilised as an exit planning tool, when directors and shareholders have taken the decision to either retire or move on to a new venture. However, MVLs are also frequently used by companies with complex corporate structures who are undergoing a period of business simplification or restructuring; this is permitted via Section 110 of the Insolvency Act 1986.
Limited companies which are part of a wider group can be closed down and its assets transferred to other parts of the business, or alternatively shares in companies can be distributed to individual shareholders, often in the case of disputes or divorce proceedings. When an MVL is used in this way as a tool to facilitate a demerger or to otherwise divide a company, it is sometimes referred to as a ‘restructuring MVL’.
Understanding Targeted Anti-Avoidance Rule (TAAR)
The Finance Bill 2016 introduced new legislation to prevent companies being wound up using an MVL, and taking advantage of the favourable tax incentives, only for the shareholders to start up a new company and continuing to trade in the same or a similar area. This legislation is known as the Targeted Anti-Avoidance Rule (TAAR).
Should HMRC have reason to believe your intention for opting for an MVL was to gain a tax advantage by not extracting money from the company via dividends and paying the relevant tax, rather than from a genuine desire to bring about the end of the company, you will fall foul of legislation and may be required to retrospectively pay tax on the distribution as income rather than capital.
The exact criteria surrounding TAAR is not clear cut, however, discussing your future plans with your appointed insolvency practitioner will allow you to determine whether you qualify for an MVL or whether you are likely to get caught up in these new regulations.
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Moneyboxing and MVLs
Another area worthy of caution is the rules governing a process known as moneyboxing. Moneyboxing is where a company is deemed to be holding excessive profits within the business in order to gain a tax advantage when the company is eventually closed through an MVL in the future.
Like TAAR guidelines, the rules surrounding moneyboxing are not without controversy. With no precise figure given on what level of funds constitutes ‘excessive’, companies which require a larger amount of working capital or are simply being cautious in ensuring their cash flow remains healthy, could inadvertently find themselves falling foul of these rules.
Before proceeding with an MVL, you should raise any concerns you have about moneyboxing or TAAR with your accountant and/or insolvency practitioner to ensure you remain compliant of these pieces of legislation.
How to start the Members' Voluntary Liquidation process
If you are considering closing your solvent company using an MVL, you should seek expert guidance from a licensed insolvency practitioner. With over 100 licensed insolvency practitioners working across 100+ offices across the UK, we are perfectly positioned to assist in placing your company into liquidation no matter where in the country you are based. Call our expert team today to arrange a free no-obligation consultation.
Frequently Asked Questions about MVLs
Differences between MVL and dissolution?
MVL and dissolution are both methods of closing down a solvent company, but there are stark differences between the two. Members’ Voluntary Liquidation is an official procedure that must be carried out by a licensed insolvency practitioner (IP). Notably, a minimum of 75% of members must vote in favour for the MVL to proceed.
In contrast, company directors can implement dissolution themselves with no professional input. Also known as company strike-off, dissolution is an inexpensive option for closing a company.
MVL does incur professional fees and is, therefore, more expensive, but its tax-efficient nature makes it highly suitable for companies with over £25,000 of retained profits. This is because distributions are taxed as capital rather than income at this level. Business Asset Disposal Relief (BADR) is also available for eligible individuals, and further reduces tax liability to a rate of 10%.
Can an insolvent company enter an MVL?
Members’ Voluntary Liquidation is suitable for solvent companies only. The process requires a written legal declaration from company directors that the business can pay all its suppliers and meet its financial obligations, including paying taxes and covering contingent liabilities that might materialise.
If directors place their company into MVL and it is later found to be insolvent, the procedure switches to a Creditors’ Voluntary Liquidation (CVL). This has serious implications for directors who may face investigation by the Insolvency Service.
When a company enters insolvency, directors must act in the best interests of creditors by ceasing trade so no further financial losses occur. If they have not done so, they could face disqualification for up to 15 years.
Why would you liquidate a solvent company?
Solvent companies are liquidated for various reasons. If a sole director is approaching retirement and there is nobody to take over the business, liquidation allows for the distribution of retained profits in a tax-efficient way.
Sometimes solvent companies are liquidated because they are no longer required. Perhaps they have served their useful purpose, and the director(s) wishes to move on to other ventures or enter employment.
A larger corporation may also wish to streamline or cut its costs, and solvent liquidation is an effective method of closure in this respect. MVL is an extremely beneficial process in many cases due to the low tax rates on distributions.
Is an MVL a tax-efficient way to close a company?
MVL is typically recommended for companies with more than £25,000 of retained profits to be distributed. Voluntary solvent liquidation is highly tax-efficient as profits are taxed as a capital gain rather than income.
This considerably reduces the tax liability for shareholders’ and this can be further reduced to an effective rate of 10% on gains of up to a £1 million lifetime allowance by using Business Asset Disposal Relief, or BADR.
The tax-effective nature of Members’ Voluntary Liquidation means directors can maximise distributions on the closure of the business. By contrast, if dissolution is used as a closure method, profits would be taxed as income rather than capital.
Further Reading on What is a Members' Voluntary Liquidation?
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