Members Voluntary Liquidation (MVL) – getting specialist advice matters!
It’s the start of another tax year and you may have postponed any disposals of assets so that the payment of any associated tax is delayed by 12 months.
You may recall that changes to tax rules, introduced on 6 April 2016, led to caution when considering solvent liquidations as a tax effective mechanism for extracting value from companies.
It is true to say that HMRC is trying to close various loopholes and clarify areas of uncertainty, but the solvent liquidation (MVL) is still an effective tool in making distributions to shareholders on the winding up of a business.
A reminder on the new tax rules:
Before the new tax rules were announced in April last year, individual shareholders could be fairly certain that a liquidation distribution would produce a receipt taxable as a capital gain, rather than as income. When considering that the lowest rate of capital gains tax is 10% (if Entrepreneurs Relief applies) and the highest rate of income tax is 38.1%, this made the MVL a very attractive way to extract funds from a company.
The new rules mean that a liquidation distribution will not automatically be taxed as capital. This applies particularly in situations where HMRC suspects tax avoidance as a motive, or where shareholders continue to carry on a similar business, either individually or through a new company, a practice known as ‘phoenixism’.
All is not lost!
While the new tax rules are complex, they do not put in place a blanket restriction on the beneficial tax treatment of an MVL. It is important to remember that all circumstances are different and no general rule should be adopted, so it is crucial to get specialist, bespoke advice. Many firms purport to provide an MVL service for a very small fee, but it pays to take proper advice from specialists that is tailored to fit your circumstances.
Some sectors have historically used MVLs as a routine way of accessing profits at beneficial tax rates – this will no longer be an option. However, the MVL process remains a tax-efficient way of extracting value from a business when it reaches the end of its useful life, be that through retirement or a sale of the business. In such circumstances, the phoenixism rules are unlikely to apply.
An MVL can bring other benefits in addition to tax savings:
- it does not cap proceeds treated as capital on the winding up at £25,000, as is the case for an informal strike off;
- the MVL process allows the liquidator to quantify, compromise and discharge future and contingent claims against the company, and deal with disputed debts in a robust way;
- assets may be distributed “in specie” which means they do not need to be sold and turned into cash for distribution to shareholders; and
- there is less come back on directors than if they go down the strike-off procedure as it deals with creditors claims under the notice to creditor procedures.
Many practitioners will tell you that the MVL is a simple process – and it often is – but this is not always the case. We can review your individual circumstances to ensure you get the best advice and take the right course of action for you and your business. Contact us now to discuss how we can help.