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There may come a time when you decide to close down your business, even if you’re still solvent. Perhaps your company has fulfilled its purpose, you’re moving on to pastures new, or you’re simply getting ready to retire.
Whatever the case, you’ll naturally want to extract every penny you can from your company through salary and dividends, but hold your horses! There might be a more tax efficient option, and it’s called a Members’ Voluntary Liquidation – or an MVL for short.
In an MVL, a business owner or shareholder appoints a liquidator to shut down their solvent company. The liquidator ensures there are no outstanding payments or liabilities before closing the business and releasing all remaining assets to the company’s shareholders.
You’ll probably know when the time’s right to shut down your business, but there are other options available to you if you’re looking to take a break rather than simply shutting up shop.
If you’re looking to leave the limited company life behind and return to being a sole trader, or if you want to make your company dormant for a little while, we’ve got all the information you need in our article “How can I close my limited company? – your options”.
If you’re sure this is the end for your business, then let’s get back to MVLs.
The main advantage of liquidating your company through a Members’ Voluntary Liquidation is the ability to extract all of the assets from the company subject to Capital Gains Tax, rather than Income Tax. This could mean more money in your pocket.
However, the cost of closing via an MVL is expensive and starts at around £2,250, which normally only makes it a viable option if you have more than £35,000 in retained profits.
Not everyone will be entitled to have the assets from the liquidated company taxed as Capital Gains, as the government introduced legislation in April 2016 targeting shareholders of “Close Companies”. Since April 2016, if you receive a distribution from a company that closed via an MVL, you’ll need to be aware of the Targeted Anti Avoidance Rule (TAAR), otherwise, all distributions will be taxed as dividends.
The TAAR is designed to prevent individuals setting up a new business immediately after liquidating a company. A distribution to an individual on or after 6th April 2016 will be subject to income tax where all of the following conditions are met:
Condition A: Immediately before the winding up, the individual had at least a 5% interest in the company.
Condition B: The company was a Close Company at the date of winding up or at any time within the previous two years.
Condition C: At any time within two years after the date of the distribution:
Condition D: It is reasonable to assume, having regard to all the circumstances that the main purpose or one of the main purposes of the winding up is the avoidance or reduction of a charge to income tax.
First of all, you need to complete your company’s final set of accounts (known as its ‘closing’ accounts). The liquidator can’t proceed with closing the company until this is done. Once this is done you’ll need to:
We’ve got a great recommended partner for you – Contractor MVLs. They offer the high quality of service you’d expect from our Crunch partners and, if you’re a Crunch client, we’ll waive our usual accounts closing fee of £250 +VAT if you use them. It’s the liquidator’s responsibility to distribute the funds between your company’s shareholders.