Members' Voluntary Liquidation Tax Implications

The decision to liquidate your company is not one to be taken lightly. It’s a process fraught with legalities and potential pitfalls. Members’ Voluntary Liquidation (MVL) is a process used to dissolve a solvent company. While it can be a beneficial way to close your business, it’s important to understand the potential tax implications.

This guide will explore the tax considerations involved in an MVL, including capital gains tax, corporation tax, and VAT. We’ll also discuss strategies to minimise your tax liability during the liquidation process.

By the end of this article, you’ll have a clearer understanding of the tax implications of an MVL and be better equipped to make informed decisions for your business.

What is a ‘member’ in MVL context?

In the context of a Members’ Voluntary Liquidation (MVL), a ‘member’ refers to a shareholder of the company. These individuals hold a stake in the business and play a crucial role in its management. They are considered part of the company and have a say in significant decisions, including the initiation of a formal insolvency process like an MVL.

Members are often the driving force behind the decision to enter into an MVL. This is because they have built up substantial reserves within the business and no longer require the company’s services. The decision to proceed with an MVL requires the consent of 75% of the shareholders, demonstrating the significant influence members have in this process.

It’s important to note that the company must be solvent for an MVL to be initiated. This means the company has more assets than liabilities and can pay off all its debts. The company’s affairs must be in order, and all necessary documents must be prepared for the insolvency practitioner when the MVL proceedings commence.

It is often utilised when business owners wish to retire and have no one to pass the company over to.It can also be used when business owners want to start a new venture and need to wind up the current one.

An MVL is a suitable option when the company has fulfilled its purpose or completed a contract and needs to be dissolved. It is also used when the company becomes redundant or unnecessary due to external changes.

The MVL process is initiated when the company’s affairs are in order and all documents are ready for the insolvency practitioner.

The process requires the consent of 75% of the shareholders, in value, to agree to the liquidation. The company accountants usually recommend the MVL process and deal with the final tax returns.

The Process of Members’ Voluntary Liquidation

The Members’ Voluntary Liquidation (MVL) process is a structured procedure that involves several key steps:

• Declaration of Solvency: This is an essential document that demonstrates the company’s ability to repay its debts within the next 12 months. It’s a statement of assets and liabilities, signed by all or a majority of the directors.
• Appointment of a Liquidator: An insolvency expert is appointed to oversee the liquidation process. This individual is responsible for settling outstanding debts, dealing with legal disputes, and distributing the remaining funds to the members.
• Meeting with Shareholders: Once the Declaration of Solvency is sworn, meetings are held with the shareholders. Here, the necessary resolutions are passed, and the appointment of a Liquidator is confirmed.
• Advertisement for Claims: The Liquidator advertises for additional claims, giving creditors a minimum of 21 days to provide details. If creditor claims are received, these are dealt with by the Liquidator.
• Asset Realisation and Distribution: The Liquidator sells the company assets and distributes the proceeds to the shareholders. The Liquidator also has the power to distribute any assets that are in a form other than cash to the shareholders ‘in specie’.
• Company Dissolution: Once all assets have been realised and distributed, the Liquidator obtains clearance from HMRC to close the MVL process. The company is then removed from the official register of companies.

Understanding these steps can help you navigate the MVL process more effectively, ensuring you liquidate your business in a manner that is both legal and beneficial to all parties involved.

How to speed up the MVL process

The speed of the Members’ Voluntary Liquidation (MVL) process can be significantly influenced by the readiness of the company’s affairs. To expedite the process, it’s crucial to have all documents prepared and ready for the insolvency practitioner at the start of the MVL proceedings.

This includes details such as HMRC references, asset and liability information, bank details, and identification documents. A key document is the Declaration of Solvency, which must be prepared and sworn in the presence of a solicitor. This document is essentially an up-to-date statement of assets and liabilities, demonstrating the solvency of the company.

In cases where there are multiple directors, a majority will need to sign the document. This declaration signifies that the company agrees to repay its debts within the following 12 months, ensuring solvency throughout the MVL process.

It’s also advisable for the company to settle its debts before the appointment of a liquidator. This is because creditors are entitled to receive statutory interest at a rate of 8% above base from the time the company is placed into MVL, until the liquidator pays the debts.

Tax Implications of Members’ Voluntary Liquidation

The tax implications of a Members’ Voluntary Liquidation (MVL) can be significant for directors. The tax advantage here is that the remaining assets, after settling all debts, are distributed to the shareholders as capital rather than income. This is a crucial distinction as capital is subject to capital gains tax, which is typically lower than income tax.

For instance, if a company has cash or asset reserves totalling more than £25,000, it’s more tax efficient to place the company into an MVL. The tax is charged at a rate of 10% as opposed to shareholders drawing the monies as a dividend, which would be treated as income and therefore chargeable at anything up to 50%.

In some cases, shareholders may qualify for Business Asset Disposal Relief (formerly known as Entrepreneurs Relief), which can reduce the tax rate further down to 10%. This is a significant tax advantage that can result from choosing to liquidate your company through an MVL.

It’s important to note that the company must be able to meet any contractual obligations and clear any legal disputes before the MVL proceedings start. The company’s affairs must be in order and all documents must be ready for the insolvency practitioner when the MVL proceedings start.

• Capital Gains Tax Advantage: The primary tax advantage of Members’ Voluntary Liquidation (MVL) is the application of Capital Gains Tax, rather than Income Tax, on the assets extracted from the company. This could result in a significant increase in the amount retained by shareholders.
• Business Asset Disposal Relief: Shareholders may also be eligible for Business Asset Disposal Relief, which can further reduce the Capital Gains Tax rate applied to the profits from the liquidation.
• Efficient Asset Distribution: MVL allows for a more tax-efficient distribution of assets when a company has cash or asset reserves totalling more than £25,000. The tax is charged at a rate of 10%, as opposed to the higher rates applied to income.
• Reduced Tax on Dividends: Profits realised from the liquidation of the company are treated as Capital Gains, rather than income. This means they are taxed under the lesser Capital Gains tax rates, compared to the relatively high income tax rates applied to dividends.
• Tax Efficiency for Solvent Companies: For solvent companies, an MVL can be a beneficial solution, keeping tax expenditure low and ensuring the company retains as much of its profits as possible.

While MVL provides significant tax advantages, it’s crucial to consult with a tax expert or accountant to understand the specific tax implications for your company.

What is Business Asset Disposal Relief?

Business Asset Disposal Relief, formerly known as Entrepreneurs Relief, is a tax benefit that can significantly reduce the financial burden on shareholders during a Members’ Voluntary Liquidation (MVL) process.

This relief is particularly beneficial when a solvent company, with more assets than liabilities, is being wound up. The company’s assets, which could range from property to cash reserves, are sold off to settle any outstanding debts and legal disputes.

The remaining funds, after all creditors have been paid, are then distributed among the members. This is where Business Asset Disposal Relief comes into play.

Instead of these distributions being subject to income tax, which can be as high as 50%, they are treated as capital. This means they are subject to capital gains tax, which is significantly lower.

In some cases, Business Asset Disposal Relief can reduce this tax rate even further, down to just 10%. This can result in substantial savings for shareholders, making the MVL process a more attractive option for winding up a solvent company.

It’s important to note that this relief is not automatically applied. Shareholders must meet certain criteria and apply for the relief.

How To Calculate Business Asset Disposal Relief

Calculating Business Asset Disposal Relief can be a bit complex, but it’s crucial for understanding your potential tax savings. 

• Identify Eligible Assets: Not all assets qualify for Business Asset Disposal Relief. The asset must have been used in your business or a business in which you had a significant stake.
• Determine Ownership Period: The asset must have been owned for at least one year before the date of disposal.
• Calculate Gain: Subtract the original cost of the asset from the sale price to determine the gain.
• Apply Relief: If you qualify for Business Asset Disposal Relief, you can reduce the tax rate on the gain from the sale of the asset to 10%.

Remember, the relief is only applicable to the gain, not the total sale price of the asset. Also, there’s a lifetime limit on the relief you can claim, currently set at £1 million.

It’s always advisable to consult with a tax professional or an insolvency practitioner to ensure you’re calculating and applying the relief correctly. They can provide expert guidance tailored to your specific circumstances, helping you maximise your tax savings.

Choosing the Right Liquidator for MVL

In the process of Members’ Voluntary Liquidation (MVL), the appointment of an insolvency practitioner is a crucial step. This responsibility typically falls on the shoulders of the company’s directors or shareholders. They are the ones who make the decision to appoint a liquidator, who will then oversee the liquidation process.

The insolvency practitioner, often referred to as the liquidator, plays a pivotal role in the MVL process. They are responsible for settling any outstanding debts, resolving legal disputes, and distributing the remaining assets to the members. Therefore, the choice of who to appoint as the liquidator is a significant one.

It’s important to note that the insolvency practitioner must be licensed. This ensures that they have the necessary expertise and experience to handle the complexities of the liquidation process. The insolvency practitioner’s role is not just about managing the company’s assets, but also about providing expert advice and guidance throughout the process.

The liquidator’s fee is another factor to consider when appointing an insolvency practitioner. It’s essential to understand the fee structure and ensure that it aligns with the company’s budget. After all, the goal of the MVL process is to maximise the return to the shareholders.

How to Choose the Right Liquidator for Your MVL

• Expertise: Choose an insolvency practitioner with a proven track record in handling MVLs. They should have the necessary skills and knowledge to manage creditor claims and distribute assets effectively.
• Fees: Understand the liquidator’s fee structure. Some may offer a free consultation or free expert advice, but their services may come with high costs. Make sure you’re aware of all potential charges before making a decision.
• Reputation: Look for an insolvency expert with a good reputation. Check online reviews and ask for references to gauge their credibility and reliability.
• Communication: Good communication is key during the liquidation process. The insolvency practitioner should be able to explain complex issues in a way that’s easy to understand.
• Availability: The liquidator should be readily available to answer your queries and provide updates on the progress of the MVL.
• Transparency: A good option would be a liquidator who is transparent about the process and keeps you informed about every step.
• Advice: The insolvency practitioner should be able to provide expert advice on whether liquidation is the best option for your company.
• Personal Approach: Choose a liquidator who takes a personal approach to your case, understanding your specific needs and tailoring their services accordingly.

MVL or CVL: Which is the Better Option?

When it comes to company liquidation, business owners often find themselves torn between Member Voluntary Liquidation (MVL) and Creditors’ Voluntary Liquidation (CVL). Both options have their unique advantages and are suitable for different situations.

An MVL is an ideal choice for a solvent company, meaning a company that can pay off all its debts. This process is often favoured by shareholders who have built up sufficient reserves within their business and no longer require the use of the company. The MVL process involves the shareholders of a company passing the necessary resolutions to appoint a Liquidator.

On the other hand, a CVL is a form of liquidation initiated by the directors of a company that is insolvent, i.e., unable to pay its debts. This process is typically more complex and can be more stressful for the company’s members.

• Solvent vs Insolvent: An MVL is used when a company is solvent, meaning it can pay off all its debts. Dissolution, on the other hand, can be used for both solvent and insolvent companies.
• Process: The MVL process involves appointing an Insolvency Practitioner (IP) who settles outstanding debts and distributes remaining funds to members. Dissolution is a simpler process where the company is struck off the register at Companies House.
• Tax Implications: MVLs can provide significant tax advantages for shareholders, with tax charged at a rate of 10% on distributed assets. Dissolution does not offer these tax benefits.
• Timeframe: MVLs can take longer due to the need to settle debts and distribute assets. Dissolution is typically quicker, but the company can be restored to the register within 20 years if someone has a valid reason.
• Resolution Requirement: MVL requires the consent of 75% of the shareholders in value. Dissolution can be initiated by a single company member.
• Asset Distribution: In an MVL, assets can be distributed ‘in specie’, meaning non-cash assets can be given a monetary value and distributed. Dissolution does not allow for this.
• Creditor Involvement: In an MVL, creditors are entitled to receive statutory interest at a rate of 8% above base from the time the company is placed into MVL. Dissolution does not involve creditors to this extent.
• Finality: Once a company is dissolved, it ceases to exist. In contrast, a company that has gone through MVL can be reinstated under certain circumstances.

In essence, the choice between MVL and CVL boils down to the financial health of the company. If the company is solvent and the members wish to wind up its affairs in a tax-efficient manner, an MVL is the better option. However, if the company is insolvent and cannot meet its financial obligations, a CVL becomes the necessary resolution.

Making the Right Decision for Your Business

Undergoing a Members’ Voluntary Liquidation (MVL) can be daunting. However, with the right understanding and guidance, it can be a beneficial process for a solvent company, offering significant tax advantages.

It’s crucial to remember that the appointment of an experienced insolvency practitioner is key to ensuring a smooth liquidation process. Moreover, understanding the tax implications, such as capital gain tax and income tax, can help you make informed decisions about whether liquidation is the right option for your business.

It’s also important to consider the potential benefits of business asset disposal relief, which can further enhance the financial benefits of an MVL. Lastly, while this guide provides a comprehensive overview, it’s always advisable to seek free expert advice tailored to your specific circumstances.

Remember, the goal is not just to liquidate your business, but to do so in a way that maximises benefits and minimises disruption.