Has your company built up a sizeable pot of cash and assets over its trading life? If the answer is yes and you intend to cease trading, you could distribute the residual cash and assets to shareholders using the Members Voluntary Liquidation (“MVL”) procedure.
The MVL procedure is commonly used as tax efficient way to make a capital distribution (10% tax rate) which is more favourable than income tax charged on retained profits exceeding £25,000, on which tax is charged at (as at April 2019):-
• 7.5% for basic rate taxpayers
• 32.5% for higher rate taxpayers
• 38.1% additional rate taxpayers
However, if you’re eligible to apply for Entrepreneurs’ Relief this would mean you pay the reduced rate of 10% on the disposal, minus the annual exempt amount for CGT (which is £12,000 for tax year 2019/20) regardless of the rate of personal tax you pay. To qualify for Entrepreneurs Relief you need to be a director of the company, own at least 5% of the ordinary voting shares for at least 12 months and the business must actually have carried out a trade.
Changes to Entrepreneur’s relief in MVL’s
Under the targeted anti-avoidance rule (“TAAR”), HMRC has the power to reclassify capital distributions as income payments if it considers that the distribution has been set up solely for the purposes of gaining a tax advantage.
If, for example, a business owner uses an MVL to close a business and distributes its assets at the lower rate of 10% CGT using entrepreneur’s relief, but then starts a new business doing the same or a similar activity within 2 years of receiving the distribution from the first business, HMRC would view the closure of the first business as activity set up for the purposes of gaining a tax advantage. Under the TAAR, it would then retrospectively reclassify the capital payment received as an income payment subject to dividend tax rates, rather than friendlier capital gains rates.
Essentially, the new rules are designed to target business owners who use the closure of a business as a tax efficient way to release funds, and continue to carry on the same, or substantially the same activity with a new business soon after (within 2 years) of the closure of the first business.
Striking off and distributions to shareholders
Distributions made as part of an informal closure (striking off the register at Companies House without going through a formal liquidation) are not taxed as income where the distribution DOES NOT exceed £25,000 (CTA 2010 “Corporation Tax Act”, s 1030A). This is only relevant is the company has paid off all its debts and expenses and the distribution is made in anticipation of applying to have the company struck off.
If the surplus exceeds £25,000, any distribution will be treated as income. The MVL process will save on tax but you will need to factor in the costs of the MVL.
The Costs of MVL
Costs include the Liquidator’s fee to cover the work prior before and after the Liquidator’s appointment, statutory advertising and other necessary expenses. We will generally quote a fixed fee which will start from £2,000 plus VAT upwards depending on the complexity of the case.
Group Restructuring using the MVL procedure
We are able to quote very competitive fees for group restructuring. It is estimated that dormant subsidiaries will cost upwards of £3,000 every year in terms of compliance, wasted management time and accountancy fees to maintain. MVL’s can help achieve more streamlined group structures and cut down on wasted time maintaining the dormant subsidiaries.
Getting a quote
If you have a company that has come to the end of its useful life and would like a quotation for a solvent liquidation, please call either Laura Walshe or Bev Budsworth on 0333 9999 689. Alternatively, you can email us at advice@thebusinessdebtadvisor.co.uk
