Thank you for your feedback

Why a Members Voluntary Liquidation (MVL)?

Sometimes you may want to close down your business even if you’re still solvent, for example, your company has fulfilled its purpose, perhaps you want to retire. If this is the case, you’ll naturally want to extract every penny you can out of the company through your salary and dividends. But, hold your horses! There might be a more tax efficient option.

Advantages and disadvantages  of Members Voluntary Liquidation

The advantages of liquidating your company through a Members Voluntary Liquidation are that you might be able to extract all of the assets from the company through Capital Gains, rather than salary or dividends. This could mean more money in your pocket.

However, the cost of closing via an MVL is more expensive and normally starts at around £2,000.  Therefore it is normally only a viable option if there is more than £35,000 in retained profits.

Tax implications of MVL

  • Distributions from the company to shareholders are taxed as Capital Gains.  This is good news because there is an additional allowance called the ‘annual exemption’ where Capital Gain up to this point is taxed at 0%

  • Capital Gains are normally taxed at a lower rate compared with income tax, with the lowest rate at 10%.  This is available if you qualify for entrepreneur's relief or a basic rate tax payer. This is a massive saving compared to current income tax rates on dividends.

New Anti Avoidance rules from April 2016

Please note, not everyone will be entitled to have their distributions taxed as Capital Gains, as the government introduced legislation in April 2016 targeting shareholders of close companies (has 5 or fewer shareholders or directors).  From this date, if you receive a distribution from a company that closed via an MVL, you’ll need to be aware of the new rules, otherwise all distributions will be taxed as dividends.

This rule is called “Targeted Anti Avoidance Rule (TAAR)” and requires the following conditions to be met:

  • Immediately before the winding up the individual had at least a 5% interest in the company

  • The company was a close company at the date of winding up or at any time within the previous two years

  • At any time within the two years after the date of the distribution:

  • The individual carries on a trade or activity which is the same as or similar to that carried on by the company or a 51% subsidiary of the company

  • The individual is a partner in a partnership which carries on such a trade or activity

  • The shareholders with more than a 5% interest carry on such a trade or activity or is connected with a company that carries on such a trade or activity

  • The individual is involved with the carrying on of such a trade or activity by a person connected with the individual

  • It is reasonable to assume, having regard to all the circumstances that

    • The main purpose or one of the main purposes of the winding up is the avoidance or reduction of a charge to income tax

  • The winding up forms part of arrangements the main purpose or one of the main purposes of which is the avoidance or reduction of a charge to income tax

Steps involved in an MVL

First of all, you need to update your Crunch account so we can complete your final accounts.  The liquidator can’t proceed with closing the company until this is done. Once this is done you will need to:

  • Appoint a liquidator to deal with the liquidation process after final accounts have been submitted. This will include paying off all liabilities of the company and remaining funds will be distributed to shareholders of the company  

  • You will need to complete a Self-Assessment for the tax year in which you close your company. As always, we can help you with this - just let us know if you want assistance

Who shall I appoint as a liquidator?

You must appoint a qualified liquidator to act on your behalf and we’ve got a great recommended partner to choose from in the Crunch Marketplace - Contractor MVLs. They offer the stellar quality of service you’d expect from bearers of the Crunch seal of approval and we waive our accounts closing fee if you use our partners. It is the liquidator’s responsibility to distribute funds.

Working example

What does the above mean for Client A who is looking to close Z Ltd on 30th April 2017?

  • Retained profits are £90,000

  • No dividend in 2017/18 tax year

  • No salary was taken from limited company

  • Had other PAYE earnings of £60,000

  • No other earnings in 2017/18 tax year

  • No other assets sold in year

  • Dividend allowance is £5,000

 

Strike off option

MVL option

Extra dividend taken before 30/04/2017

£65,000

£5,000 to utilise dividend allowance

Total limited company earnings in 2017/18

Total dividends = £65,000

Total capital gains = £25,000

Total dividends = £5,000

Total capital gains = £85,000

Annual exemption used

£11,300 @ 0%  = £0

£11,300 @ 0%  = £0

Entrepreneurs relief capital gains

£13,700 @ 10% = £1,370

£73,700 @ 10% = £7,370

Dividends taxed

£5,000 @ 0% = £0

£60,000 @ 32.5% = £19,500

£5,000 @ 0% = £0

MVL fee (assume £2,000)

 

£2,000

Total tax & fee

£20,870

£9,370

 

Last Updated: 20 Sep 2018 04:16PM BST

Related Articles

No articles found

https://cdn.desk.com/
false
desk
Loading
seconds ago
a minute ago
minutes ago
an hour ago
hours ago
a day ago
days ago
about
false
Invalid characters found
/customer/en/portal/articles/autocomplete