14th June 2017
What is Members’ Voluntary Liquidation or MVL?
A Members’ Voluntary Liquidation (MVL) is the process of the company Directors formally liquidating the company. This involves appointing a liquidator, advertising the liquidation in the London Gazette and officially shutting down the company.
Liquidation is a common insolvency procedure. The company’s shareholders make a sworn Declaration of Solvency, meaning the company’s finances and balance sheet have been reviewed and confirm that the company can repay all existing and future debts within no more than 12 months. Advertising the voluntary winding up in the Gazette makes it a matter of public record; it should not affect your business reputation as a CVL (a Creditors’ Voluntary Liquidation) would. This is where a company’s creditors receive the liquidation proceeds as opposed to the shareholders.
If your remaining company funds are below £25,000
If the funds to be distributed at the company close down are less than £25,000, you can treat this as a dividend or capital distribution. The company can be ‘struck off’ the Companies Register, provided it has not traded in the last three months and isn’t threatened with liquidation or have any agreements in place with creditors. The first £2,000 dividends paid per year are exempt from tax – please see our guide on Personal Taxation for more on how the remainder would be taxed.
If your remaining company funds are over £25,000
For funds distributed over £25,000, there are two options:
- Apply to have your company struck off and treat the amount drawn as dividends
- Enter an MVL and apply for the funds to be treated as a ‘capital distribution.’
The benefit of entering an MVL is that where funds to be distributed exceed £25,000, they will be treated as a capital distribution and potentially be taxed at 10% regardless of your other income. Capital Gains are usually taxed at 10% or 20% depending on the tax rate of their other income (18%/28% on residential gains), but the 10% rate could apply if the shareholder can utilise CGT Business Asset Disposal Relief (BADR) formerly known as Entrepreneurs’ Relief (ER).
ER is available on qualifying business disposals provided that:
- The company is a trading company.
- The company has been owned for more than one year.
- You are an employee or director of the company.
- You own at least 5% of the ordinary share capital and 5% of the voting rights.
In addition to the 10% tax rate, a further potential benefit is that each shareholder has an annual CGT exemption of £6,000 (2023/24). This could be utilised to reduce the distribution proportion subject to Capital Gains Tax.
The drawback to entering an MVL is that an official liquidator needs to be appointed to handle the process. An Insolvency Practitioner would charge approximately £3,000+VAT for this service. In many cases, however, the tax saving far outweighs this initial cost.
While MyAccountant.co.uk do not offer this service, we have several trusted partners who can assist and offer a smooth transition as you look to extract your hard-earned profit from the business.
If you’d like more information about our services, don’t hesitate to get in touch with us at 0800 917 9100 or send us an e-mail at firstname.lastname@example.org. Remember to follow us on LinkedIn, Facebook and Twitter for more guides and blog articles.