If you are a director looking to liquidate your business, director-led liquidations take two key routes; Members Voluntary Liquidation (MVL) and Creditors Voluntary Liquidation (CVL). Although both result in the liquidation of a company, the causes and effects of an MVL and CVL are very different, so it is important for company directors to understand the implications relative to each form of liquidation.
Members Voluntary Liquidation
The first thing to know about Members Voluntary Liquidation is that it is usually the right solution for a solvent company, where the director wants to wind up the company to extract cash and assets in the most tax efficient way. However, not all businesses qualify for an MVL.
In order to qualify for Members Voluntary Liquidation, your company must meet the following criteria:
- Your company must have traded for more than a year
- Your company’s assets must be in excess of £25,000
- You must be an employee of the business and hold at least 5% of the shares
In addition to these requirements, should you liquidate your company by MVL, you must not trade via a limited company for a minimum of two years following the liquidation of your company. Please note, HMRC take this rule extremely seriously. In 2016, the government introduced the Targeted Anti-Avoidance Rule (TAAR) in order to stop contractors from setting up “phoenix companies” by closing one company and distributing the profits, only to then launch another company immediately.
Key tax benefits of MVL
If you do qualify for MVL, this route to liquidation could provide significant tax advantages. Rather than receiving remaining profit as a dividend, which would mean paying Capital Gains Tax of 18% or 28%, should you qualify for an MVL, you can use your tax-free allowance of £12,300 and may also be able to utilise Entrepreneurs’ Relief, which means you only pay Capital Gains Tax of only 10%.
Creditors Voluntary Liquidation
In contrast with an MVL, Creditors Voluntary Liquidation is often the best choice for liquidation when your company is insolvent. When your business has greater liabilities than assets, as a director and shareholder, you can use CVL to wind up the company.
Under a CVL, it is assumed that your company is no longer viable, and therefore, unable to continue as a going concern. In order to go ahead with a CVL, shareholders of the company must agree to this course of action, before seeking the help of a licensed insolvency practitioner.
The insolvency practitioner will act as liquidator and all directors’ powers will cease from the point of liquidation. As liquidator, the insolvency practitioner will collect any debts owed to the business, as well as arranging for any assets to be sold, and assessing and agreeing to claims by creditors. Once all debts are paid, the company can be dissolved at Companies House.
An Insolvency Practitioner’s Role
In both Members Voluntary and Creditors Voluntary Liquidation, it is mandatory that a qualified and licensed insolvency practitioner is appointed as liquidator. As well as acting on your behalf, an experienced insolvency practitioner can also review the financial position of your company and advise you on all of the options that are available to you. In many cases, there is more than one route you can take.
If your company is solvent, the advice of an IP can make a big difference in how much tax you have to pay when liquidating your company to distribute assets. If your company is insolvent, this may not necessarily mean that your business cannot be rescued. An IP provide guidance to help you choose the most beneficial route for your company.
If you need the assistance of a licensed insolvency practitioner, you can contact BEACON LIP.