MVL Vs STRIKING OFF
What with changes to ESC16 legislation coming into force in April 2013 us Insolvency Practitioners are becoming inundated with savvy accountants wishing to save their clients tax when they close down their Solvent Company by taking advantage of Members Voluntary Liquidations (MVLs) and the entrepreneurs relief it brings. ESC16’s old rules allowed for various reliefs which are no longer as available therefore this article looks to inform you on what an MVL is and when it is appropriate (however, you can also find how an MVL works and the steps to be taken by the clients accountant on our MVL page, linked above). Or if your company is insolvent then click here for further advice on Insolvent Liquidations (CVLs).
What is an MVL?
A Members Voluntary Liquidation is the process by which a solvent company is wound up and dissolved. It enables shareholders to exit the business and withdraw any capital within it or arrange for assets within the company to be transferred into their personal estates.
When is an MVL appropriate?
Generally, an MVL is appropriate where the company has, for whatever reason, reached the end of its purposeful life and there are realisable assets or cash sufficient to pay all creditors within a specified period together with statutory interest. The surplus assets are distributed to shareholders, either in cash or in specie. Common scenarios include where shareholders wish to retire or where the owners wish to cease to trade due to either the business being no longer viable or having been sold in a break up sale.
What are the Advantages to an MVL over Strike Off, and What are the alternatives to these?
The alternative to MVL is simply to apply for the company to be struck off and dissolved. Historically, by applying for an extra statutory concession from HMRC, directors were able to effectively wind up a company and distribute its surplus assets to shareholders without the need for a liquidator. Such distributions were tax advantageous for shareholders as the distributions were taxed as capital gains rather than income.
More recently, the extra statutory concession has been enacted into law and a limit of £25,000 has been imposed on the total amount that can be distributed and treated as capital, rather than income, for tax purposes. However, the legislation provides that once the £25,000 limit is reached, all distributions will be treated as dividends (i.e. not only distributions over and above the £25,000 cap). Placing the company into MVL ensures that all distributions can be treated as capital without limit.
There are further advantages of an MVL in comparison with an application to strike off, which are often considered equally important to the tax savings on assets above the limit, these are:-
• If creditors have not made a claim against the company for anything they may be owed whilst the Liquidator was in office, they may not (with very few rare exceptions) later apply to have the company restored to the register in order to pursue legal action against it. Any application to restore the company must be made within 2 years of its dissolution, whereas an application may be made at any time within 20 years of dissolution in the case of strike off without liquidation.
• An application to strike off can only be made if the company has not, in the previous three months, traded or carried on business, changed its name, or sold business assets, rights or property. An MVL can be instituted immediately on cessation of trade and is the most efficient way to wind up the affairs of a solvent entity.
• Finally, in a liquidation (and once creditors have been paid) there are no restrictions on distributing funds to shareholders, including distributions of capital & reserves, which are usually prohibited as unlawful dividends outside of liquidation.
For more information about entrepreneurs relief generally see our latest article HERE.