Members Voluntary Liquidation – an overview
Can I wind up my company even if it is not insolvent?
Yes, a solvent winding up or Members Voluntary Liquidation (“MVL”) is often a legal requirement if directors/shareholders wish to retire and the shareholders wish to receive the surplus funds in the company and benefit from Entrepreneurs Relief on the tax due on the receipt of those funds.
If directors are unable to resolve an internal dispute an MVL can also be used to the same effect as a more cost effective alternative to the compulsory winding up of the company (which will necessitate the involvement of the Official Receiver and incur costs on statutory scale rates).
An MVL can also be utilised as an exit if a project for which a company was created has come to an end e.g. the development of a property or the completion of a joint venture.
Alternatively, In the event that a company has ceased to trade, has no remaining liabilities and has less than £25k in surplus assets, it is possible to simply distribute the remaining funds to shareholders and let a company become dormant. The distribution will be treated as capital for tax purposes. You are able to do this as long as the company isn’t:
- Receiving income/profits
- Involved in business activity
Prior to a solvent liquidation (Members Voluntary Liquidation)
Before placing the company into an MVL, there are a number of essential steps to ensure that the process is completed correctly and to keep the costs of a liquidation (i.e. the amount directly done by the liquidator) to a minimum. These steps will include:
- You and/or your accountant/tax advisor must inform HMRC of your decision to dissolve the company and, where your advisers think this is appropriate, seek clearance.
- Confirm you have paid, or can pay, outstanding debts including any trade debts, warranties and contingent debts, e.g liabilities dependent upon insurance claims and legal proceedings.
- Terminate any leases and pay any rents/charges due under those leases
- Close the company’s bank accounts
- Ask HMRC to close the company’s payroll
- Pay employees their owed wages and any redundancy money and pay in lieu of notice if the closure of the company affords them less notice of their redundancy than that to which they are contractually entitled.
- Pay off any outstanding PAYE, National Insurance and Taxes
The process for Members Voluntary Liquidation
The company directors swear a declaration of solvency stating that the company is solvent and that its known liabilities will be paid in full within 12 months. Thereafter the shareholder(s) must pass a special resolution placing the company into a member’s voluntary liquidation and appointing a liquidator.
In what circumstances would distributions in a MVL not qualify for Entrepreneurs Relief?
If the shareholder(s) of the company enter into a similar business within 2 years of the MVL and distribution of that company’s assets, Entrepreneurs Relief may be rescinded retrospectively by HMRC.
If the company has had very little recent trading activity and a significant percentage i.e. more than 80% of the company’s surplus assets or recent income are made up of funds/interest accumulated from former trading profits e.g. in circumstances where cash at bank which has been merely held and not actively managed as an investment by the company for a considerable period of time, HMRC may argue that Entrepreneur’s Relief is not available on the distribution of these particular assets as there has been no trading activity in respect of those assets, but only if it is deemed that there is “substantial non-trading activity”.
Specific advice would therefore be required in each individual case.
(Entrepreneurs Relief is a scheme open to directors who own 5% or more of a company’s shares, which only applies to capital gains up to a lifetime limit of £10 million calculated over any number of similar distributions.)
Clearly this is a basic overview of an incredibly complicated financial area – if you think an MVL is the right route for your business, seek expert advice, talk to your accountant and seek the help of an insolvency practitioner to help you understand all the elements.
Straight talking advice from Yorkshire Powerhouse
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