Updated: 3rd November 2020
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 an exit planning tool when a profitable company has reached the end of its useful life, where shareholders are keen to extract the profits of their investment, or if its directors are approaching retirement or otherwise looking to depart from the business for any other reason.
While MVLs can be a great way for a solvent company to bring about an end to its affairs in a tax-efficient manner, they are not suitable for every business. Firstly, in order to qualify for an MVL the company must be solvent – that is able to settle its liabilities in full within 12 months. If your company is insolvent, you will need to consider an alternative closure method such as a Creditors’ Voluntary Liquidation (CVL) or Administration. These are formal insolvency procedures which bring about the end of a company which is unable to pay its outstanding liabilities.
Secondly, for a company with retained profits over £25,000, an MVL is often a financially prudent way of extracting the proceeds from a business which is no longer required; however, if your business has relatively little in the way of profits to extract, you may wish to consider dissolving the company instead.
Dissolving a company – also known as ‘striking off’ – is a relatively simple process which is actioned by submitting a DS01 form to Companies House and paying the appropriate fee (currently £10). Notice of your intention to dissolve will be advertised in the Gazette, and as long as no objection to the strike off is received, the company will be struck off two months later. If your company owes money either to HMRC or trade creditors which it cannot pay, it is likely they will file an objection to the dissolution; your application will be suspended and you will then have to consider another closure measure such as a CVL or Administration.
Up to £25,000 can be taken from a company on striking off, and this will be treated as capital rather than income. You should remember that once the 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, once all liabilities have been paid in full.
MVLs are more expensive than striking off due to the involvement of a licensed insolvency practitioner. However, if your company has a large amount of money to distribute, it is vital that this is handled in the correct manner by a professional who knows the intricacies of closing down a profitable business. Likewise, if the company’s affairs are complicated you need to know you are entrusting your business to someone you can rely upon. Attempting to strike off the company yourself (where the company holds funds in excess of £25,000), 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 MVLs meaning your company will be dealt with on an individual basis at your local office and you will always have a point of contact throughout the entire liquidation process.
The main cost of entering into an MVL 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 at around £87 + VAT each; 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.
Upon closure of a company by way of an MVL all retained profits are treated as capital rather than income. 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.
When selling, giving away, or otherwise closing your business, you may be entitled to take advantage of Business Asset Disposal Relief (known as Entrepreneurs’ Relief until April 2020), 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.
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 an MVL 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.
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.
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.
An MVL 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.
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.
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.
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.
Often MVLs 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’.
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.
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.
If you are considering closing your solvent company using an MVL, you should seek expert guidance from a licensed insolvency practitioner. With over 70 licensed insolvency practitioners working across more than 80 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 on 0800 644 6080 to arrange a free no-obligation consultation.