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Are you thinking about closing your limited company?
No matter the reason for the closure, be it retirement, a sale after a merger or simply closing the doors on a company that is no longer required. As long as you have over £25,000 of net assets to distribute between shareholders a Members’ Voluntary Liquidation (“MVL”) will probably be one of the closure options to consider.
An MVL is the formal process to bring a solvent company to a close. A licensed insolvency practitioner is appointed as liquidator and will realise the company’s assets, pay any outstanding creditors and then distribute the remaining surplus funds to the company’s shareholders.
In an MVL, the company must have paid or be able to pay all its creditors and contractual liabilities within 12 months of liquidation.
Your Net Asset Value is simply the value of what your company owns outright, minus what it owes, giving the resulting figure of the company’s monetary worth (the Net Asset Value).
Closing your company through an MVL process allows your company assets to be transferred to you by way of capital distribution and thus be potentially eligible for Business Asset Disposal Relief (formerly Entrepreneurs’ Tax Relief). This is a generous allowance whereby you are taxed at 10% on the entirety of the company assets, potentially saving you £1000s.
If your company is solvent and you can settle all liabilities within 12 months, you can place the company into MVL in the following way:
The other route of closing down a solvent company is by way of Strike Off (also called dissolution).
Companies House charges a nominal fee (£8) to action a strike-off, you will pay income tax on your net assets.
If you have over £25,000 of net assets after all liabilities have been paid, the tax savings assigned to an MVL compared to a strike-off will usually mean an MVL will see more of your hard-earned cash find its way back into your pocket.
To answer this, let’s use an example:
Mr Jones has a successful Ltd company and has been contracting for the last two years. He now has a role inside IR35, however, and no longer needs his limited business. He is the sole shareholder/owner and has £50,000 in the bank and is VAT registered.
There are two main options open to him:
Option 1 would be to strike the company off. In doing so, the owner’s £50,000 would be taxed at 32.5% (taxed on the shareholder as dividends), costing him £16,250. Companies House charge an additional (albeit nominal) administration charge of £8 leaving funds in the bank of £33,740.
Option 2 would be an MVL. This route, the shareholder would benefit from the Business Asset Disposal Relief (formerly Entrepreneurs’ Tax Relief), taxed at only 10%, once the Insolvency Practitioners’ (IP) fees have been deducted.
Based on the asset position of £50k, a typical Insolvency Practioners’ fee will be circa £2,000 plus expenses and VAT. The expenses will be a statutory bond at £40, statutory advertising at £302.40 and sundry expenses at £15.58, totalling £2,357.98 plus VAT (£471.60).
If the company is VAT registered, the VAT can be reclaimed back by the IP and distributed to the shareholder, so in this instance, we will assume this has been actioned and add it to the total saving.
The Insolvency Practitioners’ fees are then deducted before the Business Asset Disposal Relief of 10% is applied, so in this case, the fees (£2,357.98) are subtracted from the assets (£50,000) which leaves £47,642.02. This amount would then be taxed at 10% = £4,764.20.
Therefore, by using the MVL the total cost would be £7,122.18 (£4,764.20 + £2,357.98). This option will result in the shareholder receiving a total of £42,877.82 after liabilities and taxes paid, leaving him £9,137.82 better off than a company strike off.
As you can imagine the higher the net asset balance, the higher the saving.
Looking at the example above, you will have probably noted the key difference in the contributing factors that make up the saving using an MVL is the 10% tax rate utilising Business Asset Disposal Relief (formerly named Entrepreneurs’ Tax Relief).
Utilising an MVL enables you to take advantage of Business Asset Disposal Relief, with all net assets (after debts have been settled) being taxed at 10%.
Fast Distribution/Cash Release:
By signing a shareholder’s indemnity, we can release a proportion of your company’s net asset value before HMRC has confirmed clearance. While different Insolvency Practitioners release funds at different stages of the process which can sometimes take up to 60 days.
Our partners and MVL specialists at SFP can usually release up to 90% (varies as per asset level) of your net asset value within 7 days of appointment.
At Clever Accounts, we work with SFP (“SFP”) who can assist you with placing your company into MVL.
To give you some insight into why we and many other companies choose to work with SFP:
You can find more about what SFPs clients are saying about their MVL service, here.
If you would like more information or simply want to discuss the options available to you with regards to closing your business, please get in touch with your dedicated accountant and they will be more than happy to advise further.
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