Business Liquidation is the process of bringing a business to an end, and distributing their assets to their claimants. This usually occurs when a company is declared as insolvent, meaning it cannot pay its obligations/debts when they are due.
Should you be in the unfortunate position where you are declaring your business as insolvent or considering your liquidation options, you may want to consider a Members Voluntary Liquidation (MVL).
What is a Members’ Voluntary Liquidation (“MVL”)
An MVL is a solvent liquidation process to enable a capital distribution back to shareholders. The MVL is designed to maximise the return to shareholders as they can potentially claim Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief).
As a result, a qualifying person is likely to pay tax at 10% if they have not already used their lifetime allowance.
If the distribution is greater than £25k, the company must enter a MVL with a qualified insolvency practitioner to claim Business Asset Disposal Relief.
Reasons for an increase in MVLs
Over the last 18 months there has been a significant increase in the number of MVLs. This can be attributed to:
1. Legislation changes such as IR35 as some contractors are now operating under umbrella businesses or moved into permanent roles.
2. Potential changes in the Budget on 3 March 2021 because of the report on capital gains produced by the Office of Tax Simplification.
As you may be aware, the lifetime allowance for Business Asset Disposal Relief (then known as Entrepreneurs’ Relief) was reduced to £1m in the 2019 budget. Further changes may be made to Asset Disposal Relief, given the need to restrict/reduce the Government budget deficit. As a result, it may be an ‘easy’ tax to change without significant public interest.
3. Covid-19 has affected once profitable businesses, prompting directors/shareholders to wind down companies to avoid the accumulated losses reducing the Company’s net asset position.
The key stages of the MVL process are:
1. The accountant prepares the draft final set of accounts to the date of liquidation to ensure that all creditors are satisfied in full prior to liquidation. This will avoid payment of statutory interest at 8% accruing and enables the company to make a payment in advance to HMRC for any VAT, PAYE and Corporation Tax debt.
2. A board meeting is held to call a shareholders’ meeting to pass a special resolution to wind the company up.
3. The directors swear a declaration of solvency confirming that they have made a full enquiry into the company’s affairs and the company is able to satisfy all creditors in full, including costs and interest.
4. A shareholders’ meeting is held to pass the special resolution to wind the company up.
In most cases, points 2 to 4 all happen on the same day to speed the process up subject to any shareholder agreements.
Once liquidators are appointed, they will liaise with HMRC to obtain tax clearance, de-register the company from VAT and close the company’s bank account. The company will be dissolved three months after they have ceased acting as liquidators.
Please note: Detailed planning may be required depending on the complexity of the matter, such as employee consultation periods.
Alternative to MVLs and Anti-Avoidance Rules
If the capital distribution is less than £25k then shareholders can simply strike the company off the register to obtain the same benefit as an MVL. Other alternatives to an MVL may include making a pension contribution to reduce the distributable amount below £25k to take advantage of the strike off route. However, pension contributions may restrict your clients’ ability to access funds in these uncertain times.
Accountants should also be aware of the Targeted Anti-Avoidance Rule (TAAR) and Moneyboxing to ensure that their clients can benefit from Asset Disposal Relief.
Do you need an MVL?
Given the potential budget changes, it may mean that you need to act swiftly to take advantage of Business Asset Disposal Relief.
Now, at Modus Accountants we are definitely not experts on this, but should you require this service we would like to recommend Begbies Traynor – A Licensed Insolvency Practitioners and the UK’s No.1 for Business Recovery. Andrew Hook is our key contact there, and were confident he will be able to help you. His contact details are as follows:
Email: email@example.com Phone: 01722 435196
Unlike other Insolvency Practitioners, Begbies Traynor’s processes mean that they can complete an initial distribution to shareholders prior to obtaining tax clearance from HMRC. Therefore, shareholders can benefit from the balance of the funds straightaway.
To make things easy to understand, they also offer a fixed fee service which includes all disbursements to enable shareholders to calculate the exact amount of their distribution.