If you’ve decided to close your limited company, a members’ voluntary liquidation is the most tax-efficient way to do it. Here we explain what an MVL is, and how the process works.
The catch is that, because it’s expensive, it’s not the right process for everyone. Depending on how much retained profit you have in your company — and how complex your affairs are — the tax savings may not be enough to justify the cost.
Here’s a rundown of the members’ voluntary liquidation process:
- What it is
- How it works
- The pros and cons
What’s a members’ voluntary liquidation?
A member’s voluntary liquidation is the formal process for closing down a solvent limited company. Your limited company is solvent if it has enough money to settle all its liabilities in full within 12 months. Liabilities include:
- Unpaid bills
- Outstanding subcontractors’ invoices
- Any loans you’ve taken, for example because you’ve bought equipment for the business
- Tax due to HMRC
- Any future liabilities that haven’t crystallised yet
There are various reasons why you’d want to close down your limited company, even though it’s solvent.
Perhaps you’re of an age where you’re starting to think about retirement. Or considering switching careers.
More to the point, the changes to IR35 — as from 6 April 2021, it’s up to private sector clients (with some exceptions) to determine whether you should be within or outwith IR35’s scope — may have left you feeling like you’ve no choice but to become a permie or work through an umbrella company.
Whatever your reasons are for liquidating your company — and without going into a long discussion about IR35 and its impact — solvency is the key requirement.
Only solvent companies can be closed down through a members’ voluntary liquidation. And you’ll need to make a sworn declaration that your company is solvent — a declaration of solvency — in order to kick off the process.
Kicking things off: how to start the members’ voluntary liquidation process
To start the members’ voluntary liquidation process, you need to do two things:
- Sign a declaration of solvency
This is a declaration that, to the best of your knowledge, the company is solvent, plus a statement of the company’s assets and liabilities. You risk a fine and prison time if you sign the declaration of solvency knowing that your company is in fact insolvent
- Appoint a liquidator
This is a professional — usually a licensed insolvency practitioner — who will settle the company’s affairs and distribute any leftover money to you after the company closes
But while these are the official steps that kickstart the process, it’s worth doing some work ahead of time, as it’ll speed up the process.
Things you can do to prepare your company for a members’ voluntary liquidation include:
- Following up on any outstanding invoices and making sure they’re paid
- Clearing your debts, including your salary and any tax due to HMRC
- Making sure your accounts and Companies House filings are up to date
- Deregistering for VAT and as an employer
It’s worth having a chat with your liquidator about this before you formally appoint them.
How does a members’ voluntary liquidation work?
Once you’ve signed the declaration of solvency and appointed the liquidator, the liquidator will get to work. They’ll let HMRC and Companies House know that the company is closing down and submit documents.
The liquidator will also advertise the fact that your company is closing in The Gazette. This makes it official and gives any creditors the opportunity to come forward and stake any claims they may have against your company.
The liquidator will then sell off the company’s business assets, collect any outstanding payments, and clear the business’ debts.
Once HMRC confirms there are no more outstanding liabilities, any leftover money is distributed to the shareholders — in a contracting scenario this is usually just you, or you and a partner. The company is then officially closed and Companies House will remove it from the register within three months.
Why go through with a members’ voluntary liquidation?
The biggest reason to go with a member’s voluntary liquidation is that it’s the most tax-efficient way to get money out of your company.
When your company closes, you’ll need to pay tax on any money you get out of it. A members’ voluntary liquidation means this money is treated as a capital distribution and, so, qualifies for business asset disposal relief — a preferential capital gains tax rate of 10%.
Imagine you wanted to close your limited company.
After settling all its liabilities, there’s £150,000 left in the bank.
If you close the company using a member’s voluntary liquidation, HMRC will consider that £150,000 to be a capital distribution and, so, eligible for business asset disposal relief.
So, your tax liability would be as follows:
- £12,300 would be tax-free. This is because there’s a yearly tax-free capital gains tax threshold called the annual exempt amount
- The remaining £137,700 would be taxed at 10%. This means you’d pay £13,770 in tax
By contrast, if you went with the main alternative to a members’ voluntary liquidation — dissolution, or striking off — the money you receive will only be treated as a capital distribution up to £25,000.
In our example, you’re getting £150,000. Because this is more than £25,000, it’s treated as income and, so, isn’t eligible for business asset disposal relief. Instead, you’ll need to pay dividend tax at your marginal rate.
£150,000 will put you in the highest tax bracket. Which means you’ll have to pay dividend tax at 38.1%. That’s a £57,150 tax bill — a whopping £43,380 more than what you’d pay if you’d closed your company using a members’ voluntary liquidation.
The downsides of a members’ voluntary liquidation
While a members’ voluntary liquidation is more tax efficient, it’s also expensive and time-consuming. So it only makes sense if your company has significant retained profits.
The main cost is the liquidator’s fee. But there are also filing fees due to Companies’ House, the cost of placing ads in the Gazette, and other disbursements.
All in all, you could be looking at a bill of at least £2,000 plus VAT which will come out of your company’s profits. And that’s if your members’ voluntary liquidation is straightforward. You can also expect the process to take at least 6 months to complete.
By contrast, striking off takes two months and involves filing one form. It costs £8 if you file the form online and £10 if you file a paper form.
The Targeted Anti-Avoidance Rule
Another thing to watch out for with a members’ voluntary liquidation is what is known as the targeted anti-avoidance rule, or TAAR. This is a rule aimed at preventing phoenixing — the practice of liquidating a company and starting up an identical one simply to avoid tax.
The TAAR prohibits you from being involved in a similar trade or activity for at least two years after a members’ voluntary winding up. So, if you close the company you contracted through in 2020, you can’t register a new company and contract through it until at least 2022.
If you do, HMRC will consider the money you received after the members’ voluntary winding up to be an income distribution rather than a capital distribution. This means the 10% business asset disposal relief rate will no longer apply and you’ll have to pay dividend tax at your marginal rate.
It’s worth noting that, when the TAAR first came into force, it was unclear whether closing down your company and joining an umbrella company risked making you fall foul of the rules.
The issue still isn’t clear cut. But the rules have been amended so that, if you continue being active in the trade as an employee and not as a business owner, it will be “less likely” that the main purpose of closing your business is tax avoidance.
One last thing to look out for with a members’ voluntary liquidation is moneyboxing. This happens when you keep profits in your company which HMRC considers “excessive” to its commercial needs and, so, made purely to get a tax advantage when you close the company.
In a 2015 consultation document, HMRC said the practice amounts to “active tax planning in areas… [that] lead to unfair outcomes.”
That said, to date there are no rules that expressly prohibit it, because it’s not clear what exactly would push retained profits from being acceptable to “excessive”.
As accountant James Abbot puts it:
“It’s very difficult to define what constitutes excessive funds. There’s no formula for deciding what a fair amount of working capital is. I know contractors who will say that the right amount is one or two months-worth of sales invoices, whereas others would feel uncomfortable if they didn’t have six months of income in their account.”
Needless to say, given that the practice is on HMRC’s radar, it’s worth being careful. Despite the technical difficulties Abbot has outlined, a clampdown might well be on the horizon.
With a preferential rate of 10%, a members’ voluntary liquidation is the most tax-efficient way to get money out of a company you want to close. The flipside is that it’s expensive, time-consuming, and subject to tricky rules.
Typically the process is only worthwhile if your company has substantial retained profits. If your retained profits are £25,000 or less, striking off is probably the better option.
That said, your mileage may vary.
Your best bet is to speak to a good contractor accountant. They’ll help you decide on the best course of action based on your specific circumstances.
Want to learn more about the members’ voluntary liquidation process and whether it’s the right move for you?
Also worth reading – our guide to Business Asset Disposal Relief (aka Entrepreneurs’ Relief).