Members Voluntary Liquidation (MVL) and Tax

Members Voluntary Liquidation can be the most effective way to liquidate your business if it is still solvent, but there are tax considerations you need to be aware of. 

What is an MVL?

Members Voluntary Liquidation, or an MVL, is an official process for closing down a solvent company. Solvent companies are those that have more assets than liabilities and can therefore pay off all its debts.

Companies entering an MVL will be dissolved and during this time, an Insolvency Practitioner (IP) will first settle outstanding debts, legal disputes and pay creditors back through the sales of assets. The remaining funds will then be distributed to the members. 

Do I need to pay tax on a Members’ Voluntary Liquidation?

Members’ Voluntary Liquidations are commonly used as a way to wind-up operations and generate a profit for the business owner or shareholders, which inevitably means you will need to pay some sort of tax on those profits to HMRC. 

However, an MVL is generally the preferred method of Liquidation for solvent companies because the MVL tax can be extremely cost effective. The exact amount will vary depending on the overall profits realised and whether shareholders can qualify for a different type of relief, such as business asset disposal relief.

It’s vital that you pay the right amount of MVL tax to HMRC when liquidating your company, as failure to do so could result in serious penalties. 

You also don’t want to overpay your business profits, so we always advise speaking to our professional team of licensed and experienced insolvency practitioners. 

How much Members’ Voluntary Liquidation tax do I need to pay?

When a company winds up through a Members’ Voluntary Liquidation, any existing liabilities must be paid off first. This includes outstanding wages, bills and any tax owed to HMRC. Once all liabilities have been settled, the company can begin to sell its assets. 

The proceeds from the sale of the assets combined with any cash reserves are then distributed to shareholders. Tax is not paid by the company on this distribution, but shareholders themselves will need to consider how much MVL tax they need to pay.

These distributed profits are classed as assets, meaning they are counted as capital and therefore subject to capital gains. These gains qualify for business asset disposal relief which has a preferential capital gains tax of 10-28%. 

For example, let’s assume you are the sole owner and sole shareholder of the company.

Your company has begun the MVL process, and once all liabilities have been paid off, there is a total of £500,000 remaining. This is your total profit from the liquidation, and the £500,000 will be classed as capital by HMRC. 

As the owner, you will qualify for business asset disposal relief, and you will pay a flat rate of 10% on your profits. However, you are also entitled to a tax-free allowance of £12,300. This means you pay tax on £487,700. 10% of this will equate to £48,770. 

What are the tax implications of an MVL?

Distributions from the company to shareholders are taxed Capital Gains. This is really good news as there is an additional allowance called “Annual Exemption” where any capital gain up to this point is taxed at 0%. 

Capital gains above the annual exemption are usually taxed at a lower rate compared with income tax, with the lowest rate set at 10%. This is available if you qualify for entrepreneurs relief, or you’re a basic rate taxpayer. This can be huge savings compared to current income tax rates on dividends. 

Tax advantages of a Members’ Voluntary Liquidation

There are a few advantages of MVL, including:

  • The distribution of shareholders is treated as a capital gain and not taxed as income or dividends
  • Entrepreneurs Relief will reduce the tax rate down to 10% as opposed to 18%, provided the gains are less than £10 million
  • Money can be saved on taxes, especially if you’re a high rate tax player

What Is Entrepreneurs’ Relief?

Entrepreneurs Relief is a tax relief that allows business owners to sell all or part of their business and only pay 10% capital gain tax on the profits made up. 

A claim for entrepreneurs relief can mean the first £1 million of qualifying capital gains are charged at an effective capital gains tax rate.

What is Tax Clearance in a MVL?

In simple terms, a tax clearance in a MVL is confirmation from HMRC that a company’s tax affairs are in order. 

Once HMRC have completed a formal tax clearance, it means they are satisfied all financial matters are concluded and no further queries can be raised in the future. 

What is Business Asset Disposal Relief?

Business Asset Disposal Relief (BADR), previously known as Entrepreneurs Relief,  is a capital gains tax relief that is intended to incentivise business owners to grow and invest in their business. 

The relief enables you to pay capital gain tax at the lower rate of 10% when you sell part of your business. This compares favourably with the current standard capital gain tax of 20%. 

Is an MVL a tax-effective method of Liquidation?

Yes, an MVL can be one of the most tax-effective methods to liquidate a company if the business is solvent. 

However, other methods such as dissolution are much quicker and easier to do than beginning an MVL, which can take months to be approved and completed. 

Dissolution is the closing down of a solvent company by selling assets, striking it off from the Companies House Register and distributing profits as dividends. 

As dividends aren’t classes as an asset, you won’t be paying the lower capital gains tax rate of 10%. Instead, you will be subject to income tax. Once you’ve exceeded your personal tax allowance for the year, you’ll be paying at least 20% tax on all your dividends from the liquidation. 

This tax rate will then increase, depending on how much you’ve made and you could end up paying as much as 45%.