A Members Voluntary Liquidation (MVL) is the process used to gather in the assets of a solvent company, pay all its creditors and distribute the surplus to the shareholders.
Whilst winding down a limited company is far from the minds of say limited company contractors who are just starting out, with luck every limited company contractor will reach the point of retirement or may even at some point re-enter the world of the permanent employment. There have been various mechanisms over the years that have allowed contractors to close their companies as tax-efficiently as possible.
Historically contractors looking to close their company would make a request to HMRC under ESC C16 to treat any final distribution as capital rather than income. However since 1st March 2012, ESC C16 was written into tax law with a distribution limit of £25,000. This means that if the distributions are less than £25,000 then ‘capital treatment’ automatically applies, however if they are in excess of £25,000 they are treated as income in the shareholders’ hands.
Even following the new rules, assets distributed under a MVL are still taxed on the shareholders’ as capital, which is why this has now become the most popular method for directors / limited company contractors to close their company. MVLs are where shareholders choose to wind down their company, and can only be used if the company is solvent. Not only do the shareholders benefit from the distributions that exceed £25,000 being treated as capital, the funds may also be subjected to Entrepreneurs Relief, a personal tax relief that reduces the tax rate down to 10%.
The process can vary case to case, depending on what assets your company has. For example is it just money in the bank? Below is a rough idea of the process you’d go through using an MVL.
- As the director of the Limited company you will need to appoint a liquidator, who must be a Licensed Insolvency Practitioner.
- The liquidator will file appointment documents at Companies House.
- The liquidator will publish in The London Gazette (or the Edinburgh Gazette) a statutory notice of his appointment.
- A notice of insolvency will be submitted to HMRC.
- The liquidator will complete post-liquidation VAT return and deregister.
- The liquidator will write to the bank to close the account and receive company funds.
- After 1 month the liquidator will distribute funds to the shareholders.
- A final report will be prepared to the shareholders and a meeting is held.
- A final corporation tax return will be submitted for the post-liquidation period.