A Guide to Members’ Voluntary Liquidation (MVL)You may have heard this word bandied around, but what is it? How can it help you as you look to close your company and why is it so tax efficient?
What is it?
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 shareholders of the company make a sworn Declaration of Solvency, meaning the companies finances and balance sheet have been reviewed and confirm that the company can repay all existing and future debts within a period of 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 proceeds of the liquidation as opposed to the shareholders.
My remaining company funds are below £25,000
If the funds to be distributed at the company close down are less than £25,000, you have the choice of either treating this as a dividend or capital distribution. The company can be ‘struck-off’ the Companies Register, provided it has not traded for in the last three months and isn’t threatened with liquidation or have any agreements in place with creditors. The first £5,000 dividends paid per year are exempt from tax – please see our guide on Personal Taxation for more on how the remainder would be taxed.
My 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 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 directors 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 £11,300 (2017/18). This could be utilised to reduce the proportion of distribution that is 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 approx. £2,500+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.