While liquidation is often associated with insolvent companies, there are in fact many reasons why you may be considering closing your profitable company using such a process.
Closing a solvent company
Perhaps you are approaching retirement and there is no one suitable to pass the business on to, maybe you are moving on to a new venture, or the market may have simply moved on rendering your company surplus to requirements. Regardless of the reasons for bringing an end to your solvent company, a formal liquidation process known as a Members’ Voluntary Liquidation – or MVL could be the most beneficial way for you to achieve this.
MVLs and Entrepreneurs’ Relief
An MVL allows for all proceeds tied up in a company to be extracted and distributed to shareholders in a tax-efficient manner. With an MVL, funds are paid out via capital distribution, meaning that distributions are taxed as capital gains rather than income. In many cases shareholders will be able to take advantage of Entrepreneurs’ Relief, which reduces the tax liability further, down to just 10%. Entrepreneurs’ Relief has a lifetime limit of £1m per person and is available to those disposing of the shares of a trading or holding company or group which they have held at least 5% of the voting rights for at least two years.
Testing a company’s solvency
The MVL process is particularly suited to companies with in excess of £25,000 worth of cash and assets to distribute. This is an alternative to striking off the company using a DS01 form which would see all profits classed as income and taxed accordingly.
MVLs are only suitable for solvent companies. A company’s solvency will be tested using the following metrics:
- Pay in full all of its current liabilities within 12 months
- Pay any interest due within 12 months
- Settle any contingent liabilities which arise or are still ongoing at the time of closure.
Shareholders will need to sign a sworn Declaration of Solvency as part of the MVL process to testify to the company’s solvent nature.
The role of a licensed insolvency practitioner
As a formal liquidation process, an MVL can only be entered into under the guidance of a licensed insolvency practitioner who will assume the role of liquidator. An MVL works in much of the same way as an insolvent liquidation, with the liquidator responsible for realising the company’s assets, settling any ongoing disputes, before distributing the proceeds. They key difference is that with an insolvent liquidation, the proceeds would be paid to outstanding creditors, while in an MVL, the proceeds are distributed amongst the company’s shareholders. Following clearance from HMRC, the company will then be dissolved and its name removed from the register held at Companies House.