Have you decided to close down your business? Has your company reached the end of its natural, useful life? Are you moving on to your next adventure or simply looking to retire? An MVL could be worth looking into.
What is an MVL?
A Members’ Voluntary Liquidation (MVL) is a formal process for closing down a solvent company in a cost-effective way. In an MVL, a business owner or shareholder appoints a liquidator to shut down their solvent company, and bring about an end to its affairs in a tax-efficient manner. The liquidator ensures there are no outstanding payments or liabilities before closing the business and releasing all remaining assets to the company’s shareholders.
When is an MVL appropriate?
An MVL could be the right course of action when a solvent company has come to the end of its useful life and needs to be wound up. For example:
- When a company is an old established family business where the owners/parents have retired and offspring or family do not wish to run the business.
- The company’s directors or shareholders may wish to retire, move overseas or have cash, property, assets etc within the company and transfer into their personal estate.
- The business is an IR35 company which is no longer required as it’s now reverting to full time employment.
- a means to re-organise a group of companies for example if a subsidiary company is no longer required or may have become dormant.
When is an MVL not appropriate?
If the company is insolvent. A company is insolvent if its assets are insufficient to pay its debts and liabilities. If this is the case and you swear the declaration of solvency, you could be committing a criminal offence. If your business is insolvent, you should consider a Company Voluntary Arrangement or Creditors Voluntary Liquidation.
Is your Company Solvent?
The first step when closing a company is to establish whether or not it can be legally classed as solvent. To be deemed solvent a company must be able to pay its current liabilities in full, pay any interest it owes, pay any contingent liabilities that may become due, such as compensation payments from court cases or employment tribunals which are still ongoing at the time of closure. The value of the company’s assets must also exceed the total of its liabilities.
What are the benefits of a Members Voluntary Liquidation?
The main advantage of liquidating your company through a Members’ Voluntary Liquidation is the ability to extract all of the assets from the company subject to Capital Gains Tax, rather than Income Tax. This could mean more money in your pocket. Company directors also have more say over the liquidation process. They can appoint a liquidator of their own choosing, which will help protect them from any wrongful trading accusations and even personal liability claims.
When the commencement of liquidation begins, there are many benefits for the company and its employees. Outstanding debts are written off and legal action against you is halted. Money owed to creditors and staff will be covered by the sale of assets, if possible, and as the director you are now free to continue with further business ventures. The potential stress of the bankruptcy process will be over, saving you the worry of dealing with creditors and potentially stressful court appearances.
What are the disadvantages of a member voluntary liquidation?
The cost of closing via an MVL is expensive and averages at around £2,000, which normally only makes it a viable option if you have more than £35,000 in retained profits. The termination of all commercial trading and the winding up of your company is a difficult decision to make, often affecting the lives of many people associated with the business. All assets will be sold to help pay debts owed to creditors. With a voluntary liquidation, it is your responsibility to arrange the appropriate meetings with shareholders, staff etc and appoint a liquidation officer. The cost of this can stretch into the thousands, depending of the amount of work involved.
Your conduct will be investigated by the liquidator and no matter how lenient they may be, you can still be prosecuted for wrongful trading, if applicable. Some directors will have made personal guarantees on loans or overdrafts, and these can enforced by the creditors as soon as the liquidation process in initiated.
How long does an MVL take?
This depends circumstances of the individual business, but it usually takes between six months and a year. It will also depend which kind of service you use and how much of the preliminary work you do before you begin liquidation.
How much does an MVL cost?
The cost of a MVL will vary depending on the type of service you require, and can range from around £1,000 to £4,000. MVLs that cost less usually require the company director to have done all the preliminary work. This includes paying all liabilities, submitting final returns, preparing final accounts, and deregistering for VAT and as an employer before beginning the process with them. More expensive MVLs will handle these for you.
What are the Tax Benefits of an MVL?
There are several tax benefits. Distributions from the company to shareholders are taxed as Capital Gains. An additional allowance called the Annual Exemption means any Capital Gain up to this point is taxed at 0%. Capital Gains above the “annual exemption” are normally taxed at a lower rate compared with income tax, with the lowest rate set at 10%. This is available if you qualify for Entrepreneurs Relief or you’re a basic rate taxpayer. This can be a massive saving compared to current interest rates on dividends.
What do I need to prepare for an MVL?
MVLs tend to be more carefully thought out and calculated ahead of time and it’s highly advised that you take the time to organise your affairs before starting the MVL process. Ensuring the company is in a straightforward state as possible helps make the process much smoother and also ensures your company definitely qualifies for this type of procedure. Discuss the possibility of entering into an MVL with a professional. Most accountants or insolvency practitioners will provide you with an initial consultation free of charge.
In order to get an MVL underway, you will need to have completed the following:
- Submit your final tax returns to HMRC. This includes corporation tax, VAT, and PAYE. You should calculate and pay any tax you owe prior to entering liquidation, even if this is not due yet.
- Sell any remaining stock or other assets of the business. These can be sold to yourself if you want to retain ownership, or to a third party. Alternatively, you could opt to have these assets distributed in specie to you by the liquidator as part of the MVL.
- De-register for VAT and de-register as an employer.
- Collect in any money owed to the business from customers.
- Pay any outstanding liabilities your company has. This could be money owed to HMRC, clients, suppliers, or any other trade creditors.
Explain the MVL process. What is the timeline of an MVL?
Signing a Declaration of Solvency
As MVLs are designed for solvent companies only and you will be required to sign a statutory declaration of solvency that has to be sworn in front of a solicitor or notary. This attests to the fact that your company is able to settle its liabilities in full within a 12 month period. This will be done after a thorough assessment of the company’s balance sheets and financial position to confirm that there will be surplus funds remaining in the business once its liabilities are taken care of. Falsely signing a declaration of solvency when knowingly insolvent is an offence and, if convicted, could result in a fine and/or up to two years imprisonment.
Meeting of members
A general meeting of shareholders must be held within five weeks of the statutory declaration. As long as the MVL is agreed to by 75% of shareholders, the company will enter liquidation and the appoin ted insolvency practitioner will take control of the company’s affairs.
Choosing a liquidator
Look for a liquidator that has experience. Choosing one experienced at dealing with HMRC and other agencies and professional who work for creditors can make a huge amount of difference. The liquidator chosen must give a written statement to the chairman of the Extraordinary General Meeting (EGM) that he is suitably qualified under the Insolvency Act 1986 and that he or she consents to act.
The Liquidation Process Begins
Once the liquidation process begins, the liquidator will notify HMRC and Companies House and submit the relevant documents. At this stage your intention to close your company through an MVL will be advertised in the London Gazette (Or Edinburgh Gazette in Scotland), making it a matter of public record. Although, as an MVL is a procedure for a solvent company, it is doubtful that it will cause you repetitional damage. Outstanding creditors are invited to submit claims for any money owed.
Capital distributions to shareholders are made
Following clearance from HMRC that there are no outstanding liabilities, and payment of any additional outstanding liabilities, the company’s funds will be distributed amongst shareholders. The company will then be dissolved and removed from the Companies House register after 3 months.
How quickly do shareholders get paid in an MVL?
In cases where there are no outstanding liabilities, the MVL process is usually completed within 6 months. However, a distribution will often be made to the shareholders before this time depending on the level of company assets and funds involved. A signed indemnity will allow for the vast majority of funds to be paid out to shareholders almost immediately while the company is still going through the liquidation process.
What is a distribution in specie?
Where there are assets which are not easily converted into cash, or where a transfer of the goods is preferred, this is known as a distribution in kind (In specie). This usually involves property or land, but can also include equipment, stock or goods. Physical assets distributed in specie are independently assessed and taxed to ensure other shareholders receive a fair distribution amount.
What are the alternatives to an MVL?
Striking off / Dissolving a company
A company can apply to be struck off the register and dissolved. If you have decided that you do not want to retain your company and wish to have it struck off, the registrar will not normally pursue any outstanding late filing penalties unless you restore the company to the register at a later stage. You can close down your limited company by getting it ‘struck off’ the Companies Register, but only if it:
- Hasn’t traded or sold off any stock in the last 3 months
- Hasn’t changed names in the last 3 months
- Isn’t threatened with liquidation
- Has no agreements with creditors, eg a Company Voluntary Arrangement (CVA)
This is done by submitting a DS01 form to Companies House and paying a fee (currently £10). Notice of your intention to dissolve will be advertised in the Gazette, and as long as no objection to the strike off is received, the company will be struck off two months later. If your company owes money either to HMRC or trade creditors which it cannot pay, it is likely they will file an objection to the dissolution, and you will then have to consider another closure measure such as a CVL or Administration.
Make your limited company dormant
If you think you might want to trade through your limited company in the future, you always have the option of putting it ‘on hold’. Instead of informing HMRC that you intend to close the limited company down, you can make the company “dormant”. You’ll still have to file certain tax returns, but they’ll be ‘nil returns’, meaning you report zeroes to HMRC to show them that you’re not trading.You can work as a sole trader outside your limited company in the meantime but this will make your Self-Assessment more complex, however.
A Company Voluntary Arrangement (CVA)
If your company is insolvent A CVA is a statutory agreement between your company and its creditors. The arrangement is legally binding and allows the insolvent company to repay a proportion of its debts over a period of 1 to 5 years. For the proposal to be approved, at least 75% of the creditors need to agree to the proposal’s terms.