Are you at the stage where you are ready to wind up your company and are looking for the most tax efficient way to do this? If your cash reserves are in excess of £35,000, you could pay just 10% tax on your profits through a Members Voluntary Liquidation (MVL).
In the current economic climate, many contractors are looking to close their company for a range of reasons. IR35 has certainly been a key factor in accelerating the number of company wind ups in recent times, however, there are also many contractors that are recognising the opportunity to retire whilst extracting maximum profits from the business, or simply looking to move on from contracting and take a permanent employed position for greater economic stability.
The benefits of an MVL
When a contractor closes a limited company, the business is liquidated in order to release profit from the business. Traditionally, once creditors are paid, the contractor will receive any remaining profit as a dividend, which they will be required to pay income tax for. Should the company be liquidated by a licensed insolvency practitioner, company profit can be received as capital, and as such, capital gains tax (CGT) of either 18% or 28% must be paid.
However, under an Members Voluntary Liquidation, Entrepreneurs’ Relief can be leveraged, reducing capital gains tax to just 10%. Company shareholders can also use their Annual Exempt Amount of £12,300 as a tax free allowance for further benefit. Needless to say, an MVL is an attractive prospect to many contractors looking to wind up their limited company, however, not everyone qualifies for this type of liquidation.
MVL Qualifications
In order to be eligible for Members Voluntary Liquidation, contractors are required to meet specific criteria:
- The company must have been trading for a minimum of 1 year
- You must refrain from trading as a limited company for at least 24 months after the MVL is complete
- Your company reserves must be in excess of £25,000 once creditors are paid
- You must hold at least 5% of shares and be an employee of the limited company
Is an MVL the right choice?
If you meet the criteria above, an MVL could be a good option for you, however, if you feel that you may change your mind about trading as a limited company in the near future, this is one important reason to opt against choosing Members Voluntary Liquidation. In 2016, the Targeted Anti-Avoidance Rule was introduced to prevent contractors from closing their company to distribute the profits, only to start up a new “Phoenix company” shortly after. To start a new limited company within 24 months of an MVL would break this law.
There are also other considerations to make before opting for an MVL. You may have noticed that in the introductory passage of this article, we suggested that an MVL could be a good choice if your cash reserves are in excess of £35,000, whilst reserves of £25,000 is the figure required for eligibility. Whilst £25,000 is in fact the legal threshold for an MVL, in order for it to be as beneficial as possible, around £35,000 of profit is needed.
There’s no one right answer
As all contractors are different, there is no one-size-fits-all approach to winding up a limited company. As a result, when deciding whether to take the MVL route, it is always a good idea to ask for professional advice from a practitioner with expertise in company liquidation for contractors.
BEACON LIP are qualified, experienced and fully licensed insolvency practitioners, who in addition to dealing with insolvency companies, can offer valuable advice on Members Voluntary Liquidation and other options for winding up a limited company.