Solvent wind-ups at a 20-year high

It has been reported that solvent wind-ups, known as Members’ Voluntary Liquidations (MVLs) were at a 20-year high for the quarter ended 30 September 2020. Shona Campbell, Partner and Head of our Business Recovery and Insolvency team expects this to continue in the short term and the team are still seeing a high number of enquiries. Shona discusses the three key drivers for this increase below.

Potential tax changes

One of the most common reasons we are getting  MVL enquiries at the moment is because of concerns around potential tax changes in the March 2021 budget. MVLs enable business owners to extract the value in their business in a tax-efficient manner. This is because Capital Gains Tax (“CGT”) applies and CGT tax rates are lower than Income Tax rates. The rate payable is often reduced even lower by Business Asset Disposal Relief (”BADR” ) which until recently was known as Entrepreneurs’ Relief.  Where BADR is applicable the taxation rate is only 10% on lifetime gains up to £10m. A recent government review recommended that CGT rates be increased in line with income tax and that the eligibility of BADR be narrowed. You can read more here. The exact nature of CGT and BADR going forward is unknown, all will be revealed at the Budget on 3 March 2021, but a rise in the tax that will be due is expected.

Off-payroll working / IR 35 legislation changes

Another common reason we are currently seeing for implementing a MVL is where a company which was used for IR35/ off-payroll working is no longer required because of upcoming changes to legislation.  Freelance workers have been able to set up their own limited company and charge an employing company for their services via that company. This freelancing occurs widely in the financial services, IT, oil and gas and pharmaceutical industries.  There are detailed rules for the applicability outlined in IR35 and the responsibility for assessing the applicability has rested with the freelancer. Where applicable, no PAYE or NIC is due and payment for services is taxed by way of corporation tax which is generally at a lower rate. It is perceived as being abused in that some arrangements which do not meet the IR35 rules are being treated as such and avoiding payment of taxes. From 6 April 2021 legislation will come in to force which in many circumstances will move the responsibility for assessing the applicability from the freelance worker to the employing company. More info here.

We are seeing employing companies being more prudent in their assessment than the freelancer was and a number of employing companies are implementing blanket policies that they will not operate off-payroll going forward. The outcome is that there are a number of companies that are no longer required. If net assets are over £25,000  then a MVL is probably the most tax-efficient way to close that company down and extract the value.

Early retirements

By “early retirements” we mean “earlier than previously planned”. Business owners who had planned to retire in the next 2-5 years are fatigued, reluctant to fund ongoing losses and reluctant to take on new finance as the pandemic continues. They have taken the decision to wind up now, rather than at a point in the not too distant future.  The proposed changes in tax which have been outlined in the first point above are also key to the decision. It is possible that any tax changes will carve out genuine retirals, for example when the business owners have traded for a number of years and are over a certain age, but there is no certainty. Unfortunately, there is even less certainty around the continued economic impact of the pandemic.

Get in touch

If you would like to discuss any of the above further then why not contact the team at Henderson Loggie to find the best solution for you.