Important changes to MVLs are on the way – here’s what you need to know

Posted on Feb 26th, 2016 | Tax

For business owners looking to wind up their business it looks like the clock may be ticking.

Changes in the Finance Bill 2016, due to pass into law at the beginning of April, put new restrictions on the distribution of company funds when a company is closed.

Until now Members’ Voluntary Liquidations (MVLs) have been the way many contractors and consultants choose to wind up their companies as company funds can be distributed as capital rather than salary. This means the director will be subject to Capital Gains tax and can utilise Entrepreneurs’ Relief (which reduces the rate of Capital Gains Tax down to 10%) rather than Income Tax.

The measures being introduced by the Government are designed to stop people abusing MVLs by liquidating companies and re-incorporating over and over again (so-called Phoenixing). Using this method profits can be extracted primarily as capital at the 10% Entrepreneurs Relief rate, rather than salary and dividends.

The rules mean any capital taken out of a business at liquidation will be taxed as salary if the director is engaged in “a similar trade or activity” within two years of the MVL taking place. So if you shut down your IT consultancy with £100,000 in the kitty, take the money out via an MVL, then form another company and continue trading as an IT consultant a year later you’ll owe HMRC tens of thousands of pounds in Income Tax and National Insurance contributions.

This is where it gets tricky – nobody can agree yet on what a “similar trade or activity” is, and many commentators have speculated this could also apply to a full-time role in the same field. This means that a contractor who chooses to take a permanent position doing the same work they performed through their limited company could be hit with a demand from HMRC.

We won’t know for sure until the consultation period on the legislation is over, but Contractor MVLs believe legitimate contractors will be in the clear. Partner Donald McNaught told us:

“We don’t think moving to a PAYE position would be covered and we think that if there continue to be proper commercial reasons -for example retirement – then the reliefs should still be available.

“The devil is in the detail however and until the consultation is over next month we cannot be certain as to the final position. We have raised the question with HMRC in our response to the consultation.”

Any changes will only apply to MVLs started from April, so for those considering closing their companies down the message is simple – don’t hang around.

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Written by Crunch Accountants

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