3 Mins
What is an MVL?
A members’ voluntary liquidation (“MVL”) is a tax-efficient way for shareholders to extract the value in a business at the end of its life. This is because the distributions the liquidator makes to the shareholders can usually be treated as capital distributions in their personal tax returns. Capital gains tax is generally at lower rates than income tax and depending on the circumstances, Business Asset Disposal Relief may also be applicable which reduces the tax payable further. Only a licenced insolvency practitioner can act as a liquidator.
What do directors need to do before placing a company into MVL?
Where a company has sold the business and assets and all that is left in the business is a cash balance an MVL is a straightforward and efficient process. Before the appointment, the directors should ensure that all liabilities have been settled and all pre appointment tax returns (VAT/CT/PAYE) have been submitted and tax due paid. This includes any stub period corporation tax return from the last annual CT return to the date that the assets were realised. The company’s existing accountant generally prepares these.
A company can be placed into MVL if there are still creditors to be paid, pre appointment tax returns to be submitted, assets to be realised and trading matters to be resolved. One reason for doing this is that the shareholders want an earlier distribution. If there are some non-cash assets remaining, these can be sold/realised by the liquidator during the liquidation. However, there will be a lot more work for the liquidator to do and therefore the costs will be significantly higher. In addition, statutory interest must be paid to the creditors. It is much cheaper and efficient for the directors to resolve matters before liquidation. There may be certain assets that the shareholders want to be transferred to them personally. This can include overdrawn directors loan accounts. If so, they can be retained and then distributed to the shareholders in the liquidation by way of an “in specie distribution” at market value.
How is a company placed into MVL?
To place the company into members voluntary liquidation there is a three-step process, and the proposed liquidator will prepare all the paperwork:
- The directors resolve to place the company in liquidation.
- The directors sign a declaration of solvency. If the company is registered in Scotland this must be done in front of a notary public. This is a statement of the assets and liabilities which also states that the company is solvent and will be able to make payment of all its liabilities within 12 months. Most solicitors in Scotland are notary publics and it can be done virtually.
- The shareholders resolve to place the company into liquidation and the liquidator is in office from that point.
What happens once a liquidator is appointed?
The liquidator can make a first distribution to the shareholders shortly after appointment. The amount will depend on the circumstances of the company and the tax planning positions of the directors.
Following the initial distribution, the liquidator will then deal with all the statutory and HMRC filings that are required, including anything that needs filed at Companies House. A final distribution will be made once tax clearance has been received from HMRC. Pre covid this would usually be within 12 months of the appointment. There are currently some significant delays, but more recent cases appear to be moving more quickly.
How much does it cost?
Liquidators usually work to a fixed fee based on the amount of work expected. There will be statutory advertising and an insurance bond to be paid. The notary public may also require a fee for the notarisation. There may be legal costs for the distribution of in specie assets. Costs will be met from the assets held in the MVL. The liquidator’s fee will be deducted from the assets held towards the end of the process. If the company was VAT registered the VAT on the fee will be reclaimed by the liquidator, even if the company has been deregistered.