There is no doubt that the last few months have been challenging for all. In light of this there are many business owners who will be considering whether this is an appropriate time to cease trading and extract their hard earned wealth from their limited companies. Where the business is solvent and can pay all of its debts within 12 months, a Members’ Voluntary Liquidation (“MVL”) can be a great way to help you maximise the value for shareholders whilst also providing other advantages, which we discuss in further detail below.
If a business has reached the end of its useful life, and the company is no longer required, you can arrange for it to be struck off at Companies House. In order to do this, you must have first paid off all of your liabilities in full.
However, where the business has traded for a period of time, there can be some unknowns lurking in the background that you may have forgotten about, such as insurance claims and historic liabilities. Using the liquidation process will ensure any potential claims are dealt with, liabilities are paid and the business can be properly closed down, giving you peace of mind.
In addition, assets can be distributed to shareholders without the need to realise them for cash. For example, there may be motor vehicles or computer equipment that the shareholders wish to keep once the business ceases to trade. The Liquidator can distribute these “in specie” to the shareholders thereby negating the requirement for them to be sold or bought back by the shareholders.
Where there are assets still in the business, these assets will need to be distributed to the shareholders, as in the example above. Where there is cash that needs to be distributed, once the company is placed into an MVL, any distributions made by the Liquidator will be treated as capital distributions, rather than income distributions for tax purposes.
If the owners qualify for Entrepreneurs' Relief then the capital gains tax (“CGT”) charged will be 10%, which is far less than the tax rate that would be used if they were to take those funds as income via wages or dividends. Also in each tax year an individual has an annual exemption. For example in the tax year to 5 April 2021 this is £12,300. This is the amount of profit you can make from an asset before any tax is payable. Of course if you were to receive capital distributions in each of two different tax years then you would be entitled to two lots of annual exemptions, thereby enhancing the value for shareholders.
You must have owned the business directly, as a personal company, throughout the qualifying period that ends on the date the business ceased. Currently the qualifying period is two years. For a company to be considered a personal company you must hold at least 5% of the ordinary share capital and those shares must give you at least 5% of the voting rights in the Company.
Until recently, the established practice in an MVL was to pay statutory interest to HMRC only from the date on which the tax fell due. This gave accountants time to produce accounts and tax returns as the tax was only due 9 months after the date of liquidation, the passing of the winding up resolution bringing the accounting period to an end.
Unfortunately HMRC have started to request statutory interest, at a rate of 8%, on corporation tax from the date of liquidation. Clearly for any new cases, shareholders need to be made aware prior to the commencement of the MVL that they need to ensure that funds are available to pay statutory interest on any debt due to HMRC from the date of liquidation. Alternatively an estimate of the amounts due can be calculated and paid pre-liquidation, even if the due date has not yet arrived.
If within two years of a capital distribution in an MVL a business owner starts to be involved in a similar trade or activity to that of the company put into liquidation they need to be careful. If this arrangement has as one of their main purposes obtaining a tax advantage then it could mean that the distributions in the MVL will be reclassified by HMRC as dividends and subjected to income tax, not CGT.
MVLs are an effective way of maximising the value for shareholders once the business has come to the end of its lifecycle. They provide peace of mind for shareholders that their business can be wound down effectively, therefore allowing them to move forward with the next chapter of their lives.