Since the replacement of ESC C16 by a statutory instrument, the process for closing a company has changed significantly. The new legislation effectively puts a cap on the tax advantage that can be gained on closure of a company by prohibiting a company with reserves in excess of £25,000 to be informally wound up. Companies looking to close since 1st March 2012 with reserves in excess of £25,000 must now be liquidated formally in order for the proceeds to be treated as capital receipts in the hands of shareholders.

Should I (or do I need to) Liquidate?

mvl chart

The flowchart above is to help you to establish whether it would be financially beneficial to liquidate your company upon cessation of trade rather than a simple winding up of the company, assuming that you are the sole shareholder of the company.

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What is Members Voluntary Liquidation (MVL)?

A Members Voluntary Liquidation is where a company is put into liquidation by its shareholders when it has ceased to trade. This type of liquidation is only available to companies that are solvent (a company that can meet its obligations as they fall due) where the shareholders have taken the decision to liquidate (opposed to the creditors, where the company is not solvent).

The Process

  1. The directors of the company being wound up must make a declaration of solvency on behalf of the company; this is broadly a statement that after having made inquiry the director's believe that the company's liabilities will be settled within 12 months of entering liquidation. In order to speed up the process we recommend that liabilities be settled prior to beginning liquidation proceedings.
  2. The members must pass a special resolution to wind up the company voluntarily which will then be filed with the Registrar of Companies (within 15 days) and advertised in the London Gazette (within 14 days).
  3. The liquidator will be formally appointed and will notify all creditors (if applicable, within 28 days), publish the appointment in the London Gazette (within 14 days) and notify the Registrar of Companies (within 14 days). In practice, providing all liabilities have been paid prior to the appointment of the liquidator, we estimate that proceedings should take somewhere between a week and a month.
  4. Any cash held by the company will be transferred to a holding account by the liquidator and distributed to shareholders once all liabilities have been paid. If there are no creditors at the time of appointment then the distribution can be made almost immediately. Any other assets held by the company can be treated as an 'in specie' payment where the asset is not readily transferable into cash and forms part of the distribution to shareholders at its accounting 'book value'.

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How much does it cost?

Nixon Williams have teamed up with a licensed insolvency practitioner to offer liquidations to contractors for a fixed fee of £1,495 + VAT and disbursements. The point at which the tax saving outweighs the MVL fee is where the company has reserves of approximately £36,650 (assuming you are a higher rate tax payer and that the gain qualifies for entrepreneurs relief).

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How will I be taxed?

When a company is in liquidation, any distributions made to shareholders during this time will be treated as a return of capital. This will therefore be subject to Capital Gains Tax rather than Income Tax (on dividends), if the gain is eligible to entrepreneurs relief then it will be taxed at 10% (after the £10,600 annual allowance has been deducted), if Entrepreneurs relief does not apply then the gain will be taxed at 18% or 28% depending on your other income.

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Entrepreneurs Relief

In order to qualify for entrepreneurs relief, the following criteria must be met:

  1. You must not have had lifetime gains in excess of £10,000,000 previously
  2. You must have held at least 5% of the issued share capital of the company for a period of 12 months up to the date trade ceased;
  3. You must have been an officer or employee of the company for the period that the shares were held;
  4. The company must be considered a trading company (defined below) rather than an investment company:
  • Non-trading income should not exceed 20% of the company's income;
  •  Net current assets should not exceed annual turnover; and
  • Any cash held by the company should not be actively managed for the purpose of generating a return.

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Continuing Trade

"Transactions in Securities" is a piece of legislation aimed at countering any possible tax advantage arising through the winding up of a company. HMRC could seek to apply this legislation if they believe that trade has not genuinely ceased where an individual winds up a company; has the resulting distribution taxed as capital and then subsequently opens another company carrying on the same trade. This legislation is therefore something that should be taken very seriously if there is any possibility that you will continue contracting in the future.

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Will it affect my credit rating?

It is a common misconception that liquidating a company using a licensed insolvency practitioner means that the company is insolvent. A Members Voluntary Liquidation is only an option when the company being wound up is able to pay its debts and therefore the credit rating of the directors will not be affected.

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How long does the process take?

Following appointment of the liquidator it is likely that in most cases the distribution of cash will be made to the shareholders within approximately four weeks, although this does depend on the time it takes HMRC to reply confirming no amounts are owed. The liquidation will normally be closed within six months from appointment and the company will be formally dissolved at Companies House after three months of the case being closed.

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mvl application liquidation application factsheet