How to close your company and extract the profits
If you are winding up your company, and your cash reserves total more than £35,000, you may be able to extract the money in just a few weeks – and pay only 10% tax on it via a Members Voluntary Liquidation (MVL), tells Cheryl Brown at Beacon Lip Limited.
The reasons for closing your company
In the present climate, contractors are winding up their businesses for various reasons. IR35 has been a major catalyst in accelerating this trend. However, many contractors are also seizing the opportunity to retire, or to move to a permanent role.
What is Members Voluntary Liquidation?
Traditionally, a contractor who closes a limited company will take any residual profit as a dividend and pay income tax on it. If your company is liquidated by a licensed insolvency practitioner, this enables that profit to be dispersed as capital, attracting capital gains tax (CGT) of 18% or 28%.
The difference with MVL is that it can leverage Entrepreneurs’ Relief and attract CGT of just 10%. In addition, the shareholders can use their Annual Exempt Amount of £12,300 as a tax-free allowance.
Do you qualify for MVL?
To qualify for Members Voluntary Liquidation, you must meet the following criteria:
- Your company must have been trading for at least a year
- You must be certain that you are not going to trade via a limited company for at least 24 months after the Members Voluntary Liquidation
- Your company reserves must total more than £25,000, once you have paid any last debts
- And you must hold a minimum of 5% of the shares and be an employee of the business
A word of warning
You should only use an MVL if you do not plan on trading as a limited company for this time. The Targeted Anti-Avoidance Rule (TAAR) was launched in 2016 for this specific purpose – to stop contractors from “phoenixing,” i.e. closing their company, distributing the profits and starting up a new business soon afterwards.
So...to MVL or not to MVL?
As you can see, MVL can deliver significant financial gain, but there are factors to consider. Are you sure you will not want to trade through a limited company for a prolonged period after taking MVL?
Do you have enough profit? Whilst £25,000 is the legal threshold for qualification for MVL, most financial experts agree that you need around £35,000 of clear profit for MVL to start to become really advantageous.
As with so many of these financial matters, there is no one right answer for all contractors. Therefore, it is important for you to seek professional advice from a qualified practitioner about your specific situation, your personal circumstances and your future plans.
There are professionals who specialise in the contractor sector, and a little guidance from them now can save you from making a costly mistake in your financial strategy, whilst maximising the benefit that may be gained from Members Voluntary Liquidation.
Beacon Lip are fully licensed and qualified to provide such advice, and also do not charge for any initial meetings. Find out more here.