IR35 Members’ Voluntary Liquidation: Closing a solvent limited company

As the IR35 private sector reform is due to come into force in April 2021, you may have experienced a surge in PSC contractors querying closure routes for their solvent companies. As the onus will now fall on medium to large private sector businesses to determine the tax status of contractors post-April 2021, those caught by off-payroll working rules are likely to experience a pay cut between 20% and 40%. As contractors look to switch to an umbrella company to balance the gap in take-home pay, a Members’ Voluntary Liquidation (MVL) may help facilitate cost-efficient company closure.

Our Members’ Voluntary Liquidation guide runs through how this provides a suitable solution for exiting PSC clients ahead of the IR35 reform and the general MVL process, helping you advise customers in the run-up to April 2021 or after.  

What is a Members’ Voluntary Liquidation?

A Members’ Voluntary Liquidation is a formal procedure to close a solvent company in a tax-efficient manner, administered by a licensed insolvency practitioner. If your client is interested in bringing their profitable business to a close as it is no longer needed or as a result of the IR35 private sector reform, an MVL can help distribute profits efficiently and bring the business to a close. An MVL consists of settling outstanding affairs, distributing capital and asset value to shareholders and closing the company.

This route is suitable for profitable businesses with the ability to settle outstanding liabilities within 12 months and retained profits of £25,000 or over for the route to be cost-efficient. An MVL allows you to extract funds which will be treated as capital, rather than dividends. Your client may be able to benefit from Business Asset Disposal relief, previously known as Entrepreneurs’ Relief, if eligible, resulting in 10% Capital Gains Tax payable. The costs associated with an MVL will vary for each business, however, disbursement costs are fixed which are essential notices issued during the liquidation process.

Members’ Voluntary Liquidation process explained

A Members’ Voluntary Liquidation is a suitable route for solvent companies only, resulting in the first stage to consist of confirming the health of the business. The company balance sheet will be assessed to ensure that the business has enough funds remaining after liabilities have been fulfilled. The company director will be required to sign a sworn declaration of solvency and a letter of engagement to formally appoint a licensed insolvency practitioner as the company liquidator. For the limited company to enter the MVL process, 75% of shareholders should agree to liquidate.

The liquidation process will begin and HMRC and Companies House will be notified. Once the liquidation notice has been advertised in the Gazette, outstanding creditors will be invited to submit claims, this stage is unlikely to threaten the process due to the solvent state of the business. After receiving confirmation from HMRC that the business does not have outstanding liabilities, company funds will be distributed, and the company will then be dissolved and removed from the Companies House register.

Members’ Voluntary Liquidation for IR35 Contractors

As PSCs caught by the IR35 private sector reform look for efficient ways of operating post-April 2021, an MVL can provide an efficient exit route. Although the responsibility for determining the IR35 status of contractors will lie with the end party in selected cases, the way IR35 status will be assessed will remain the same. If conducted correctly, the result generated post-April-2021 should be the same as the result determined today.

If you would like further information on a Members’ Voluntary Liquidation route or alternative company closure or rescue options, call us on 0800 063 9258 and ask for David Tattersall or Carole Vizzard.