Members Voluntary Liquidations v Dissolution: Which is right for your client?

In recent times, I have received a flurry of phone calls from accountants seeking advice as to whether a Members Voluntary Liquidation (MVL) is the right procedure for their client to follow.

Sometimes it involves an owner who has sold their business and has been left with a shell company to dispose of.

In other scenarios, a director has expressed a wish to retire. Queries also regularly relate to a requirement to liquidate a Special Purpose Vehicle, or Entity, that has now achieved its objective.

MVLs have continued to increase in popularity over the last 12 months, despite HMRC tightening up the tax benefits available to shareholders. The number of MVLs has tripled since 2011-12, when 3,634 companies entered into solvent liquidation.

To assess whether an MVL may be right for a client, it is important to state what it is, what it achieves and what the alternatives may be.

What is an MVL?

An MVL involves a voluntary process of liquidating or winding up a solvent company by its shareholders. When the decision has been made to close down a company and all the assets have been sold, a formal winding-up through a MVL is often a tax-efficient way of distributing the funds, as the tax payable will be capital gains rather than income tax.

Whilst the company may still have debts, it is important for the directors to be certain that it is solvent.

A majority of the directors are required to swear a Declaration of Solvency on behalf of the company, confirming that it will be able to pay its debts in full, including interest, within 12 months of the commencement of the liquidation. 

In the event that it transpires that the company is in fact insolvent and it is placed into creditors’ voluntary liquidation by the liquidator, it is presumed that the declaration was not made on reasonable grounds, which could leave the director swearing the document liable to a fine and/or imprisonment.

Dissolution

When dissolution is appropriate, a director can complete an application to strike off (form DS1) and send this to Companies House and to anyone who could be affected, within 7 days.

Dissolution should not be used to try to avoid paying debts. Firstly, creditors are invited to object to the striking off, and numerous penalties exist for directors who knowingly attempt to strike off a company with outstanding creditors.

If no objection is received within 2 months, the company is dissolved.

Why not just dissolve the company?

We are often asked this question. The key to choosing the correct procedure will depend on the assets or monies owned by the company.

If your client has assets of less than ￡25,000, a strike-off may be the more appropriate procedure. In this instance, all shareholders pay capital gains tax. If the company’s retained profits are more than ￡25,000, all shareholders will have to pay income tax at their personal rate. This is when directors begin to question whether an MVL is the more appropriate method of closure for their Company.

If the company structure is complex or the value of the company assets, after creditors have been paid, exceeds ￡25,000, then an MVL may be the preferred way forward.

Entrepreneurs’ Relief

With an MVL, all distributions to shareholders are taxed as a capital gain. However, shareholders may be able to claim Entrepreneurs’ Relief in an MVL, which will reduce the amount of capital gains tax to be paid from its standard rate to 10%. Shareholders are required to take advice from a tax specialist before making any decisions about whether they will qualify for the relief in an MVL. This reduced 10% rate is lower than the capital gains rate but it is important to note that there is a limit on the amount able to be claimed, which is capped at ￡10m over a lifetime.

Only an insolvency practitioner (IP) can act as a liquidator in an MVL. This will mean that the costs of an MVL will usually be in excess of a voluntary strike-off. The amount that can be saved by distributing funds as capital rather than income is usually significantly greater than the costs of the liquidator’s fees involved in completing an MVL.

There are many additional advantages to an MVL. When shareholders resolve to close their company via this method, the whole operation is carried out by an insolvency practitioner. This removes much of the stress from directors, in terms of carrying out the process, and minimises the risk of personal liability. The IP will ensure that all statutory requirements are met, including gaining the requisite approval for closure from HMRC.  The IP will take specific steps to wind down the company’s operations, including selling assets, repaying creditors in full, finalising the company payroll and filing the final tax returns. There is no doubt that this can take a huge weight off the shoulders of the directors.

If any of your clients are looking to close a limited company in the near future, then please get in touch for a no-obligation chat about the best options.