Members Voluntary Liquidation or MVL - Advice on ending the life of a solvent company and the tax benefits
Closing your Company and extracting the capital in the most tax efficient way
What is a Members Voluntary Liquidation?
Where the life of a solvent company is to be brought to an end a Members Voluntary Liquidation, or MVL, is the most popular method that is used. A MVL is sometimes known as a "solvent liquidation" as all creditors are paid in full and the surplus is then distributed to the shareholders. The main reason why a Members Voluntary Liquidation, or MVL, is used is to obtain the benefit of much lower tax rates on the capital you extract from your company.
Capital returned to shareholders in a liquidation is taxed at capital gains tax rates, and therefore at a lower rate than if the funds were taxed as dividends or taken as salary.
Also if Business Asset Disposal Relief, formerly known as Entrepreneurs Relief, is available then the tax charged could be as low at 10%.
Purnells have developed a guide to Members Voluntary Liquidations, which will assist your understanding.
Why use a Members Voluntary Liquidation?
There are also various other reasons why the directors or shareholders of a solvent company might wish for the life of the company to be brought to an end through the use of a MVL. Those reasons might include:
1. A dispute has arisen between the shareholders and directors of the Company, making it impractical for the Company to continue in its current form.
2. A reconstruction of the company is needed to return excess capital to the shareholders via a "capital distribution " thus avoiding high rates of personal income tax.
3. The end of trading following the retirement of the main person.
4. Due to the statutory notices to creditors, a Members Voluntary Liquidation can also be used fixed creditors claims, so that if any unforeseen claims did arise in the future, those claims would not disturb the distributions to the shareholders.
Requirements & Procedure
In order for a Company to be placed into Members Voluntary Liquidation the directors of the Company must swear a Declaration of Solvency incorporating a Statement of Affairs to demonstrate that the company is solvent, i.e. can pay all its debts in full, which also needs to be filed at Companies House. Section 89 of The Insolvency Act 1986 records the detailed rules regarding that "statement of truth" (formerly a "Declaration of Solvency" was required to be sworn by the directors). The essence of Section 89 is that the directors, or a majority of them, must sign a statement of truth that:
- They have made full enquiry into the Company's financial affairs and
- They have formed the opinion that the company will be able to pay all its debts, with an addition for interest, within twelve months
If that statement of truth is made then it is the members (shareholders) of the company who are the ones who control the appointment of the liquidator in the liquidation, not the creditors. All creditors will be paid in full, together with statutory interest, and therefore creditors have no financial interest in how the members voluntary liquidation winding-up is conducted or who the liquidator should be.
It is therefore the members (shareholders) who appoint the liquidator of their choice in a Members Voluntary Liquidation or MVL. The liquidator then lays his annual and final accounts before members only. Read the 'possible alternative approaches' to see if a Members Voluntary Liquidation is the best step for your company to take.
A Members Voluntary Liquidation is, in many instances, used to obtain tax benefits. In a MVL the distributions made by the liquidator to the shareholders are "capital distributions" as opposed to "income distributions". Capital distributions are subject to Capital Gains Tax not Income Tax. The tax payable is therefore much reduced after applying the various capital reliefs that are available - such as entrepreneur's relief (now called business asset disposal relief), which can reduce the tax payable to 10%!. There are also yearly Capital Allowances and annual exemptions for individuals thus further reducing the tax payable.
The most time-consuming part of the liquidation process is obtaining tax clearance from HMRC. Tax clearance is basically HM Revenue and Customs confirming that they have received all of the outstanding returns, the tax has been paid and they have closed the file. Once confirmed the liquidation can be closed. Unfortunately, it is taking HMRC six to twelve months to provide tax clearance, which means that the liquidation process can last upto, and sometimes longer, than twelve months. However, most liquidators are happy for the majority of funds to be distributed to the shareholders early on in the process, so that the HMRC delays do not overly affect the shareholders.
For more information and advice on Members Voluntary liquidations please refer to the index on the left hand side of this web page or call one of our Insolvency Practitioners on 01326 340 579.
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