Closing a company with an MVL – still a tax-efficient option in 2025?

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 your company has and how complex its affairs are, the tax savings may not be enough to justify the cost.

What’s in this guide?

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 several reasons why you might want to close down your limited company, even if it’s solvent.

Perhaps you’re of an age where you’re starting to think about retirement or considering a career switch.

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 delving into a lengthy discussion about IR35 and its impact — solvency is the primary 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 — to kick off the process.

Kicking things off: how to start the MVL 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 discussing this with your liquidator before you formally appoint them.

How does an MVL work?

Once you’ve signed the declaration of solvency and appointed the liquidator, the liquidator will get to work. They’ll notify HMRC and Companies House that the company is closing down and submit the necessary documents.

The liquidator will also advertise the fact that your company is closing in The Gazette. This makes it official and allows any creditors 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’s debts.

Once HMRC confirms that there are no outstanding liabilities, any remaining funds are 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 primary reason to opt for a member’s voluntary liquidation is that it’s the most tax-efficient way to extract funds from your company.

When your company closes, you’ll need to pay tax on any money you get out of it.

An MVL means this money is treated as a capital distribution and may qualify for Business Asset Disposal Relief (BADR). If the conditions are met, BADR reduces the CGT rate on qualifying gains to 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:

• There is a yearly tax-free capital gains tax threshold called the annual exempt amount. Using the current £3,000 allowance (2025/26), £3,000 would be tax-free.
• The remaining £147,000 would be taxed at 14% if BADR applies. That is £20,580 in CGT. Please note the BADR rate rises to 18% from April 2026.

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 exceeds £25,000, it’s treated as income and is therefore not eligible for business asset disposal relief. Instead, you’ll need to pay dividend tax at your marginal rate.

At the additional rate, that would be 39.35% in 2025/26. Ignoring allowances for simplicity, the liability on £150,000 could be around £59,025.

Of course, this liability could be considerably lower, depending on how much income you have already earned during the tax year in question.

The downsides of an MVL

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 be deducted from 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 approximately two months and involves filing one form. The fee is £33 online or £44 by post.

The Targeted Anti-Avoidance Rule

Another thing to watch out for with a members’ voluntary liquidation is 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 purely 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 2024, you can’t register a new company and contract through it until at least 2026.

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 14% 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 primary purpose of closing your business is tax avoidance.

For more on timings after liquidation, see our separate guide: how long after an MVL before you can start a new company.

Moneyboxing

One last thing to look out for with a members’ voluntary liquidation is moneyboxing.

This occurs when you retain profits in your company that HMRC considers “excessive” to its commercial needs, and thus made purely to obtain 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.

In summary

With a preferential rate of 14%, a members’ voluntary liquidation remains the most tax-efficient way to extract money from a company you want to close. The flip side is that it’s expensive, time-consuming, and subject to complex 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 consult with a reputable 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?

Speak to a specialist contractor accountant from our comprehensive list.

What to read next

• Voluntary strike off (DS01): eligibility, timeline and fee
• Dormant limited company: filings, record keeping and reactivation
• How long after an MVL before you can start a new company
• Business Asset Disposal Relief explained

Always seek advice from a qualified accountant or insolvency practitioner before taking steps to close your company.