When should you choose a Members’ Voluntary Liquidation?

December 11, 2020 / MVL

A Members’ Voluntary Liquidation (MVL) is a formal process that winds-up a company, meaning its operations will end and it will cease to trade.

Unlike other forms of liquidation, an MVL is completely voluntary and available only to those companies that are solvent and sustainable.

There are many reasons a company may choose to close with a Members’ Voluntary Liquidation. It might be because the director is retiring, taking a step back to an employee role, moving abroad or initially set up the company to fulfil a purpose which has now been completed.

If you are considering an MVL and are looking for more information before you take the next steps, Clarke Bell has put together this guide on everything there is to know about Members’ Voluntary Liquidation and why you would choose this route.

What is a Members’ Voluntary Liquidation?

A Members’ Voluntary Liquidation is a legal process that winds-up a solvent company. Only companies that are solvent and have assets of over £25,000 can undergo this process.

This is a completely voluntary process initiated by company directors and shareholders.

There are also other types of Voluntary Liquidation, including Creditors’ Voluntary Liquidation (CVL), as well as compulsory forms of liquidation, namely a Compulsory Liquidation in which a company is forced to close.

Members’ Voluntary Liquidation vs Creditors’ Voluntary Liquidation

Although both are completely voluntary processes, the key differences between a Members’ Voluntary Liquidation and a Creditors’ Voluntary Liquidation are that whereas an MVL is only available to solvent companies, a CVL is only available to insolvent companies.

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As we have touched on, the other option is Compulsory Liquidation. This is not voluntary however and is forced on the company.

What is involved in the MVL process?

If you choose to kick start the Members’ Voluntary Liquidation process, the company director must first call a meeting with shareholders. 75% of shareholders must agree in order for the MVL to progress.

The company director must then make a Declaration of Solvency which proves that the company is:

  • Solvent and can pay its bills and cover its daily costs
  • Can pay all its creditors
  • Can pay all its taxes
  • Can meet any contractual obligations

This is information must be accurate and up-to-date to reflect the true state of the company’s affairs. This is important as submitting false information is a serious offence.

Then, the company director must appoint a licensed Insolvency Practitioner. As a formal process, an Insolvency Practitioner is legally required to oversee and carry out the liquidation process.

How can you choose the right Insolvency Practitioner? 

As the individual that will coordinate and oversee the MVL, it is important that you work with a licensed Insolvency Practitioner that will get the best possible outcome for you. After all, the IP you decide to work with can have a big impact on the end goals of the MVL so it’s important that you do your research to find the best one.

There are a few key things to look out for when choosing an Insolvency Practitioner to work with. You should always ensure that the Insolvency Practitioner you use is:

  • Fully qualified and licensed. This is key as those that aren’t licensed cannot legally carry out the liquidation process
  • Has expertise in your industry or with similar cases to yours
  • Has a good reputation
  • Has a proven track record of happy clients
  • Charges fair fees
  • Is a good communicator who can clearly explain the best route forward for your case

Why choose an MVL?

Now you know how an MVL works, let’s look at the advantages to taking this route and what benefits it can offer company directors.

One advantage of an MVL is that it allows directors to quickly close their business and free up funds. What’s more, it a completely voluntary process and will only be initiated when the time is right for the director.

However, perhaps the main advantage of an MVL is that it allows the director to close their company in a tax efficient way.

This is because any funds taken out of the business through an MVL are subject to Capital Gains Tax (set at 10%) rather than Income Tax (set at 18% at the basic level or 28% at the higher level)

There are further tax benefits for entrepreneurs that are eligible for Business Asset Disposal Relief, otherwise known as Entrepreneurs’ Relief until 6th April 2020. This means you can sell all or part of your company and pay just 10% in Capital Gains Tax on profits over the lifetime of your business up to a limit of £1 million.

This can save company directors a small fortune on their tax bill and is one reason why thousands choose to close their business with an MVL each year.

To work out how much you can save through Business Asset Disposal Relief you can follow these simple steps:

  • Calculate your total taxable gain. Do this by adding together all your capital gains, taking away your losses
  • Take away your tax-free capital gains allowance, this is £12,000 for individuals
  • You will be left with a figure which you can deduct 10% off which you will pay in tax

For more help, check out our guide on everything you need to know about Business Asset Disposal Relief in 2020.

Let Clarke Bell’s team of experts help with Members’ Voluntary Liquidation 

Whatever your reason for selling your solvent company, if you have decided this is the best route for you, Clarke Bell can help with the next steps.

Our team of professional tax advisers or accountants can make sure you close your solvent business whilst taking full advantage of Business Asset Disposal Relief whilst remaining compliant to your legal tax obligations.