In the Autumn Statement last year, along with a few other restrictions on contractors, plans were announced to curb the use of Member’s Voluntary Liquidations (MVLs). Whilst guidelines have been given, further rules around MVLs and their uses are expected in the Budget on 16th March 2016 – but by then it might be too late to act!
Member’s Voluntary Liquidations are a method of winding up your limited company and are useful if you have high reserves remaining. They allow the shareholders to distribute the reserves as a Capital Gain, which are taxed at lower rates than dividends if you’re a higher rate taxpayer.
Some shareholders will qualify for Entrepreneurs’ Relief, which carries an even lower rate of tax at 10%.
The option is only available to solvent companies (who can pay their debts) and is an alternative to closing the company by striking off.
If you want to go down the MVL route you need to appoint an authorised insolvency practitioner who will charge a fee. Usually the tax saving outweighs the cost, but it’s best to talk it through before deciding on this course of action.
If you have reserves of £25,000 or less then you can extract the funds as a Capital gain without the need for an MVL.
MVLs will still be around and useable by contractors, but the changes are designed so they can be used for more ‘legitimate’ business reasons, retirement for example. They are part of the anti-avoidance measures announced in the budget, which the government are looking to bolster over the next few years. In future HMRC might block or reverse the application of the lower tax rate and instead apply the usual dividend rate to the reserves released from the company.
In particular the plans will restrict so-called ‘phoenix’ companies, where a company that’s built up high reserves uses the MVL to extract the funds efficiently, then the main shareholder sets up another company with the same trade.
HMRC is looking to introduce time restrictions, so there has to be at least two years between the shareholder winding up one company and starting another of the same trade.
With the changes to the way dividends are taxed next year (see our blog here) the MVL option seems especially attractive if you can do it in the next couple of months.
If you think an MVL might be for you, get in touch with your dedicated accountant before you do anything. There are a few factors which might mean it’s not the right option, but we’ll be able to put you on the right path at least.
You will need to act quickly so get in touch as soon as possible. The changes will be introduced from 5th April 2016 at the latest, so get cracking.
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