Now and again, we have clients who are thinking of closing their limited company. This doesn’t necessarily mean the company is struggling or closing its doors due to bad management, it could be due to a number of reasons. They could be a contractor who is retiring, or someone who’s thinking of going back to full time employment. It could simply be a case of closing the doors on a company that is no longer required.
Closing the business can be a difficult decision to make, but to do so in the most tax efficient way, a Members’ Voluntary Liquidation (MVL) may be required.
As long as you have over £25,000 of net assets to distribute between shareholders, an MVL may be the best route to take.
But what is an MVL and how do you begin the process?
What is a Members Voluntary Liquidation?
An MVL is the formal process to bring a solvent company to a close. A licensed insolvency practitioner is appointed as liquidator and will realise the company’s assets, pay any outstanding creditors and then distribute the remaining surplus funds to the company’s shareholders.
In an MVL, the company must have paid or be able to pay all its creditors and contractual liabilities within 12 months of liquidation.
What is my Net Asset Value?
Your Net Asset Value is simply the value of what your company owns outright, minus what it owes, giving the resulting figure of the company’s monetary worth (the Net Asset Value).
Is an MVL right for me?
Do you want to dispose of your company in a tax efficient manner?
- Are you at the end of your contract?
- Are you returning to full time employment?
- Is your limited company no longer required?
- Are you considering or planning retirement?
- Do you have more than £25,000 of assets once all debts have been paid?
Closing your company through an MVL process allows your company assets to be transferred to you by way of capital distribution and thus be potentially eligible for Business Asset Disposal Relief (formerly Entrepreneurs’ Tax Relief).
This is a generous allowance whereby you are taxed at 10% on the entirety of the company assets, potentially saving you £1000s.
Are you eligible for Business Asset Disposal Relief (formerly Entrepreneurs’ Tax Relief)?
- The Entrepreneurs’ Relief allowance is generally only available via an MVL process (depending on remining asset level).
- You must be a director, partner or employee with more than a 5% shareholding.
- The business must have been a trading company for the last 24 months.
If you’re unsure as to whether you are eligible for Business Asset Disposal Relief, it’s so important to speak to your dedicated accountant who knows your company inside and out.
At Gorilla, we offer specialist tax advice to you throughout your time with us and if you decide to close the company. We know your personal financial circumstances, so will be the best people to give you impartial advice as to what the best route to take will be.
The MVL Process
If your company is solvent and you can settle all liabilities within 12 months, you can place the company into MVL in the following way:
- A Board of Directors’ Meeting is held and resolutions are passed to start the MVL procedure.
- The Directors swear a Statutory Declaration of Solvency. This is a statement confirming that the company will pay all debts (plus statutory interest and costs) in full within 12 months together with a statement of assets and liabilities.
- A Shareholders’ Meeting is held and resolutions are passed appointing the Liquidator and placing the company into Liquidation.
- Notice of appointment must be sent to the Registrar of Companies and to creditors within 14 days and 28 days respectively. Creditors are given at least 21 days to claim any amounts owed. The Declaration of Solvency must also be filed at the Registrar of Companies within 15 days.
- Notice of appointment must be advertised in the Gazette within 14 days.
- After the 21-day period for creditors to submit their claims, the Liquidator will look to agree and pay them. The Liquidator has 2 months to do so, however he will typically undertake this in short order, subject to receipt of any complex claims being received. Statutory interest at 8% pa is also payable.
- The Liquidator seeks confirmation from HMRC that there are no outstanding tax matters.
- As soon as the liquidation is complete, a proposed final account and report are issued to the shareholders. 8 weeks later, a final copy is sent to the shareholders and to the Registrar of Companies and the Liquidator is released from office. This 8-week period can be shortened, if all members give consent in writing.
- The company is dissolved 3 months later.
What other options do I have?
The other route of closing down a solvent company is by way of Strike Off (also called dissolution).
Companies House charges a nominal fee (£8) to action a strike off and from there you will pay income tax on your net assets.
If you have over £25,000 of net assets after all liabilities have been paid, the tax savings assigned to an MVL compared to a strike off will usually mean an MVL will see more of your hard-earned cash find its way back into your pocket. However, there are occasions where an MVL may not be possible,
What are the benefits of an MVL compared to a Strike Off?
To answer this, let’s use an example:
Mr Ford has a successful Ltd company and has been contracting for the last two years. He now has a role inside IR35, however, and no longer needs his limited business. He is the sole shareholder/owner and has £50,000 in the bank and is VAT registered.
There are two main options open to him:
Option 1 would be to strike the company off. In doing so, the owner’s £50,000 would be taxed at 32.5% (taxed on the shareholder as dividends), costing him £16,250. Companies House charge an additional (albeit nominal) administration charge of £8 leaving funds in the bank of £33,742.
Option 2 would be an MVL. This route, the shareholder would benefit from the Business Asset Disposal Relief (formerly Entrepreneurs’ Tax Relief), taxed at only 10%, once the Insolvency Practitioners’ (IP) fees have been deducted.
Based on the asset position of £50k, a typical Insolvency Practioners’ fee will be circa £2,000 plus expenses and VAT. The expenses will be a statutory bond at £40, statutory advertising at £302.40 and sundry expenses at £15.58, totalling £2,357.98 plus VAT (£471.60).
If the company is VAT registered, the VAT can be reclaimed back by the IP and distributed to the shareholder, so in this instance we will assume this has been actioned and add it to the total saving.
The Insolvency Practitioners’ fees are then deducted before the Business Asset Disposal Relief of 10% is applied, so in this case the fees (£2,357.98) are subtracted from the assets (£50,000) which leaves £47,642.02. This amount would then be taxed at 10% = £4,764.20.
Therefore, by using the MVL the total cost would be £7,122.18 (£4,764.20 + £2,357.98). This option will result in the shareholder receiving a total of £42,877.82 after liabilities and taxes paid, leaving him £9,135.82 better off than a company strike off.
As you can imagine, the higher the net asset balance, the higher the saving.
Looking at the example above, you will have probably noted the key difference in the contributing factors that make up the saving using an MVL is the 10% tax rate utilising Business Asset Disposal Relief (formerly named Entrepreneurs’ Tax Relief).
Your accountant can calculate the best route to go as there are many things to consider such as the applicable dividend tax rate and availability of an annual capital gains tax free allowance.
The Main Benefits of using an MVL
Tax Efficiency:
Utilising an MVL could enable you to take advantage of Business Asset Disposal Relief, with all net assets (after debts have been settled) being taxed at 10%.
Fast Distribution/Cash Release:
By signing a shareholder’s indemnity, you can release a proportion of your company’s net asset value before HMRC has confirmed clearance. While different Insolvency Practitioners release funds at different stages of the process which can sometimes take up to 60 days, we partner with SFP who can usually release up to 90% (varies as per asset level) of your net asset value within 7 days of appointment.
We partner with SFP
We work with SFP, who can assist you with placing your company into MVL.
- They are the preferred licensed Insolvency practitioners to the top contractor accountants as well as a significant number of Chartered Accountancy firms across the UK.
- Last year, SFP were appointed on more MVLs in the UK than any other practice.
- SFP have worked alongside us for many years to ensure a very smooth, joined-up approach, reducing the risk of any issues, giving you peace of mind and ensuring a quick turnaround.
- And, possibly most importantly, you could receive up to 90% of your funds within 7 days of appointment!
What SFP offer clients
- Release up to 90% of the net assets within 7 days – offer attractive distribution of up to 90% of net assets position (after all liabilities are paid) within 7 days.
- Peace of mind your money is in safe hands
- Expert MVL team specialising in contractors with a personalised service with their own dedicated consultant, who will guide you step-by step throughout the whole process.
Closing your limited company can come with organisational, personal and financial stress which can be avoided if you speak to the right people regarding your insolvency. At Gorilla, our clients’ needs are our number one priority, right until the end.
If you would like more information or simply want to discuss the options available to you with regards to closing your business, please get in touch with your dedicated accountant and they will be more than happy to advise further.
