The route you take to close your company will be determined by the health of your business and whether it is solvent or insolvent. If your business is viable, has predictable income and strong asset value, closing your solvent company in a tax-efficient route is essential to maximising returns, in line with UK tax legislation. A common company closure route taken by profitable businesses is a Members’ Voluntary Liquidation (MVL), a formal process for cash-rich companies interested in extracting funds in a cost-efficient manner.
What is a Members’ Voluntary Liquidation?
A Members’ Voluntary Liquidation (MVL) is an exit route used to facilitate the closure of businesses which are no longer needed, or as a result of owner retirement. This route is administered by a licensed insolvency practitioner and is typically suitable for businesses with retained profits over £25,000 for the liquidation option to be cost-effective. .
What happens during an MVL?
Timeline of the MVL route:
- you must sign a sworn declaration of solvency
- seek advice from a licensed insolvency practitioner, if they recommend an MVL route, you will need to appoint a liquidator to lead the process.
- liquidator will notify HMRC, Companies House and post an advert in the Gazette, inviting for claims to be submitted.
- HMRC need to confirm the business has no outstanding liabilities for company funds to be distributed to shareholders
- the insolvency practitioner is responsible for settling company affairs, which will dissolve the company and remove it from the Companies House register
Please note that a business is typically classed as solvent if it can fulfil company liabilities within 12 months. This will be determined through an assessment of the company balance sheet.
How efficient is a Members’ Voluntary Liquidation?
When closing your company through an MVL, all retained profits will be treated as capital, rather than income. This means that the funds distributed to shareholders will be subject to Capital Gains Tax, rather than Income Tax. This is more efficient than extracting the funds as dividends, resulting in tax savings through the MVL route.
You may also be entitled to Business Asset Disposal Relief, also known as Entrepreneurs’ Relief until April 2020. This scheme essentially grants tax relief by reducing your tax liability, allowing you to take advantage of Capital Gains Tax at a flat rate of 10% on qualifying gains. The lifetime limit for this is £1 million, recently reduced from £10 million.
How much does an MVL cost?
The main cost associated with an MVL is the payment to your chosen licensed insolvency practitioner, who will be responsible for the liquidation of your business. The fee will depend on the intricacies of your business, the complexity of your situation and the value of distributable profits.
Smaller costs also come from:
- disbursements, such as legal notices and Gazette adverts
- some insolvency practitioners will also charge a bond to protect company funds
Alternatively, if you wish to exit from your company and have no reservations about sourcing a new owner, you may consider selling your solvent business.
What are the benefits of selling my solvent company and what should I consider?
By selling your business, you can transfer ownership to an interested party, preserving the structure of your business, company operations and brand identity. If your business has the potential to grow under strong leadership, selling your business is a sustainable way to recycle your company, rather than closing. Companies with untapped growth potential can thrive under the guidance of a seasoned owner, generating greater profits.
You may decide to sell your company through a business transfer agent, business sale broker or independently which will determine the next step in your journey. Conducting a market appraisal will help establish the financial value of your business. By carrying out a company valuation, you can use the knowledge to make informed decisions when establishing a sale price and negotiating with buyers. It is common for company directors to participate in a partial or full sale, depending on the competitive nature of the offer and type of buyer.
When exploring company closure or sale options, it is instrumental to seek professional advice from a licensed insolvency practitioner to ensure that you select the best route for your company.
If your business is struggling because of the coronavirus crisis see what support is available to you on our Coronavirus business legal centre.