What is a Members’ Voluntary Liquidation?
A Members’ Voluntary Liquidation, or MVL, is a form of solvent liquidation commonly used by retiring directors to close down their company and extract profits in a tax-efficient manner.
MVL can be the best option in a range of other circumstances as well – for businesses that have served their purpose, for example, or when directors wish to return to employment or move on to a new venture.
The involvement of a licensed insolvency practitioner (IP) means the process is properly administered, and all the statutory obligations of directors are fulfilled. The appointed liquidator realises company assets, ensures all creditors are repaid, and distributes the proceeds to shareholders.
A tax-efficient process
One of the main reasons why directors choose Members’ Voluntary Liquidation is because profits may be extracted as capital rather than dividends, so the levels of tax payable can be vastly reduced.
The dividend tax rate currently stands at 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers, once the £2,000 dividend allowance has been used (2019/20). This contrasts starkly with Capital Gains Tax (CGT) which can be as low as 10% when entrepreneurs’ relief is also claimable.
Although Members’ Voluntary Liquidation incurs professional fees and is more costly than other closure methods such as company dissolution, these tax-savings can certainly make it financially worthwhile.
How does Members’ Voluntary Liquidation work?
MVL is a formal procedure that must be carried out by a licensed insolvency practitioner. Initially a board meeting is held to pass a winding up resolution and appoint a liquidator, after which the directors sign a Declaration of Solvency, which is filed at Companies House.
Shareholders vote on whether to proceed and if 75% (by share value) vote in favour, the company is placed into liquidation by the office-holder. The liquidator realises the company’s assets, paying all creditors from the proceeds, and distributes the profits to the shareholders.
Is MVL right for you?
Could an MVL be the right closure option for you? Members’ Voluntary Liquidation can be a good choice if your business assets have a value of £25,000 or more. It’s a relatively quick way to close down your company, and the potential for tax savings is a significant attraction.
But if you’re going to open a new business after the MVL, you also need to consider HMRC’s Targeted Anti Avoidance Rules (TAAR). These regulations safeguard against tax avoidance and ‘phoenixism,’ which is the practice of closing down companies via solvent liquidation and then opening new, similar businesses to gain a tax benefit.
MVL and tax avoidance
So what are the Targeted Anti Avoidance Rules, and how could they impact you? Essentially, you may be forced to pay dividend tax rates on the monies extracted from your company if:
- You had a minimum of 5% shareholding in the company prior to the MVL
- It was a ‘close company’ – in other words, a company with five or fewer ‘participators’ (shareholders)
- You open a new business that’s the same or similar in nature to your previous company within two years of the MVL
If you’re a retiring director and are considering a Members’ Voluntary Liquidation, or would like more information on the best way to proceed, it’s crucial to seek professional guidance from a qualified accountant.
Handpicked Accountants can offer reliable recommendations for fully qualified and trustworthy accountants in your area, matching their services with your needs. We have longstanding professional relationships with accountants throughout the country – call one of the team to find out more.