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  • Writer's pictureMarco Piacquadio

The benefits of a solvent liquidation


Marco Piacquadio, Director of FTS Recovery and FA Simms, gives us his expert guidance on why Members’ Voluntary Liquidation could be the best way to wind-up a client’s solvent business.


A solvent liquidation, a Members’ Voluntary Liquidation (MVL), is a tax-efficient method for extracting capital from a solvent company. It allows shareholders to receive a distribution of the company's surplus assets - including cash reserves, investments and other assets - in a tax-efficient manner.


It also gives the company director(s) the peace of mind that all claims have been paid and legal obligations met, so they can move on once the company is wound up. 


 

When is a Members' Voluntary Liquidation (MVL) used?


An MVL is an option when a solvent company has reached the end of its life cycle or when the shareholders wish to extract the company's surplus cash reserves in a tax-efficient manner and close the company.


Retirement planning: If the company's owners are looking to retire and want to wind down the business, an MVL allows them to extract the company's assets in a tax-efficient way, potentially reducing their overall tax liability.


Moving into full-time employment: This has been more common since the changes to IR35 regarding off-payroll contractors . An MVL can be an effective way to distribute a company's retained profits, so that the company director can begin their next chapter.


Extraction of profits: If a company was set up for a specific reason and has now served its purpose and is lying dormant, the accumulated significant profits can be distributed using an MVL, before the company legally ceases.


 

What are the advantages of an MVL?


It’s tax efficient: One of the primary objectives of an MVL is to distribute the company's surplus assets to its shareholders in an orderly and tax-efficient manner. This is because there are certain tax advantages attached to the process.

 

Any funds remaining after paying creditors can be distributed to shareholders as capital rather than income. This means shareholders can pay Capital Gains Tax rather than Income Tax. This reduces shareholders’ tax obligations because Capital Gains Tax is set at a lower rate than Income Tax. 

 

Most directors can also claim Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief), which means they pay just 10% tax on qualifying assets under £1m.


There’s little work for your client to do: An MVL is a liquidation process that needs to be handled by a licensed insolvency practitioner, who will manage the process from beginning to end. 


This means it’s generally a faster and simpler process than if the company directors were to sell all the assets, distribute funds and close the company themselves. Instead, the insolvency practitioner guides the process, while your client focuses on closing down operations smoothly.


Everything’s done correctly: Because a licensed insolvency practitioner is involved, there are specific steps that must be taken to make sure the winding up of the company is done properly. 


For example, it’s part of their role to make sure that payments to creditors and shareholders are dealt with fairly and that the company is wound up following legal requirements. With an MVL. nothing is overlooked, so your client can rest assured there will be no unpaid debts or other unwanted surprises down the line.


 

What are the criteria for an MVL?

Solvency is an essential feature of an MVL. The directors must make a statutory declaration of solvency, confirming that the company has no outstanding debts or that it will be able to settle all its liabilities within 12 months of the MVL.


As well as confirming its solvency, you can also ask these questions of your client’s company before exploring an MVL.


Does it have over £25k in retained profits? If they’re below this amount, then the funds are taxed as a capital distribution anyway.


Are the shareholders likely to agree? 75% of the shareholders must pass a special resolution approving the voluntary winding-up of the company.


Have they ceased trading or are they preparing to? The company must have ceased trading or have plans to cease trading prior to the commencement of the liquidation process.


Are there ongoing contracts? The company should not have any ongoing contracts or obligations that cannot be terminated or fulfilled before the liquidation process begins.


Is the company tax compliant? The company must be up-to-date with all its tax filings and payments, including corporation tax, VAT and PAYE. We would recommend that all outstanding tax is paid to avoid incurring statutory interest charges.


Are there any ongoing legal disputes? There should be no pending legal disputes or ongoing litigation against the company that could impact its solvency or delay the distribution of assets.


If your client’s business is insolvent, a Creditors' Voluntary Liquidation (CVL) - also known as insolvent liquidation - could be the solution for them.


 

Alternatives to an MVL


When considering winding up a company using a formal process, an MVL is not the only option available.


If the company has less than £25k in retained profits, you can opt to strike off the company from the Companies House register, also known as dissolution or company strike-off. The downside to this is that the process does not provide the same level of protection and finality as an MVL.


If the directors are unable to make a declaration of solvency, a CVL could be used to realise the company's assets, with the proceeds paying off the outstanding debts. While this might seem like a longer way to achieve the company’s closure, the benefit is that all debts are paid and legal obligations met. As with an MVL, if all is in order, there’s then no chance of repercussions later down the line.


Ultimately, the choice between an MVL and other formal company closures depends on factors such as the company's financial position, its creditor position, the complexity of the company's affairs and your client’s desired outcome.


We’ll work with you and your client to assess how viable an MVL is for their business and carefully evaluate the alternatives. Talk to us about your client’s situation by calling 01455 555 444 or emailing enquiries@fasimms.com

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