It is odd, we all know that the time will come eventually, when we need to move on to do something else. This could be retire and indulge in our hobbies or other interest or to just cut back on the time we spend running the business, but we are all reluctant to face up…
Members Voluntary Liquidation – An alternative way to exit your business
What is an Members Voluntary Liquidation
A Members’ Voluntary Liquidation (MVL) (or Solvent Liquidation) is an alternative way (other then selling the business to a third party or management) of a shareholder exiting a company. It is useful for an exit method for individual shareholders but also for family businesses where one member wishes to retire or exit.
It enables shareholders to put a solvent company into liquidation in order to unlock their capital. It can be used to secure an orderly winding up of a company or to close down a subsidiary (within a group of companies) that has outlived its usefulness. You will need a special resolution to allow this and so owners of 75% of the shares need to agree.
The Shareholders need to appoint a Liquidator, and a Statutory Declaration of Solvency made by the directors is required, stating that the directors have conducted a full inquiry of company affairs and believe that it can repay its debts, with interest, within a 12-month period.
The Liquidator is appointed at an extraordinary general meeting of the company, if approved by 75% of shareholders’ votes. The Liquidator realises the company assets, settles any creditor claims and distributes the remaining assets to shareholders.
Why enter an MVL?
It is often the case that a single member of a company wishes to exit for whatever reason but the others want to carry on. They do not wish to wind the company up and walk away.
The dilemma is then how to pay off the member who is leaving in the most tax efficient way without his or her incurring excessive tax on the payment and leave the others with a company.
Up to April 2016 the money you take out of the company as a result of a members voluntary liquidation was treated as a capital distribution rather than income and therefore taxed under the Capitol Gains Tax rules and not as Income Tax. Entrepreneur’s relief is available for capital payments thus reducing the tax burden from 18% to 10%.
However, changes have been made and now any distribution is taxed under the new dividend rules ie:
7.5% for dividend income within the basic rate band;
32.5% within the higher rate band; and
38.1% within the additional rate band.
But if what is known as a “S110” liquidation is used then the method is tax neutral since the structure has been pre agreed with HMRC. It also allows the company to be wound up with newco/s formed to receive the assets of the company being wound up. The newco can be run by the continuing shareholders whilst also allowing the exiting shareholder/s to receive payment in a tax efficient manner.
It can also be used to restructure the business in a tax efficient manner and restructuring within a group whereby certain companies are no longer required
A liquidator does not have to investigate the conduct of the directors as he would in other liquidations. Neither does he have to file any conduct returns to the Insolvency Service, unless the MVL converts to a CVL – Creditors Voluntary Liquidation.
What do you need to do?
The company’s accountants complete the taxation work, directors assist in the collection of book debts and other assets and the disposal of any physical assets.
MVLs are normally quite straightforward, usually directors have already realised the assets of the company.
The taxation has been agreed
All that is left to do is to distribute the cash in the company.
Pinstripe Legal Services is pleased to act in association with PCR LLP to provide expert advice on company rescue, restructuring and insolvency work.
If you want to know any more about exit planning, insolvency or any similar matter then please get in touch by contacting:
firstname.lastname@example.org or call me on 01291 430 124.