MVL: When the time to close your contractor limited company is right
If you’re a contractor battling the thought of company closure for your solvent business, this is a prime time to determine the best time to shut shop, and of course, shutting down doesn’t have to be for good, writes Keith Tully, partner at Real Business Rescue, a Members’ Voluntary Liquidation specialist.
The calm before the potential storm
But why consider now? Well, we’re ominously awaiting the findings from the Capital Gains Tax review, a device which makes up the nuts and bolts of an MVL, in addition to Entrepreneurs’ Relief which is also subject to change in April 2021. Plus there’s the rumoured Autumn Budget 2020 tax package from the chancellor inauspiciously dubbed by him ‘not a horror show.’
So there’s a strong case to be made to using the calm before the potential storm to pinpoint the exact moment to seek an MVL, to maximise the funds returning to your balance sheet.
How you got here
First, let’s review how many have got here. The Covid-19 lockdown may have forced you to take a different perspective on things or even just rekindle interest in old hobbies, leading you to arrive at the realisation that it’s time to hang up the gloves.
If you’re on the flip side and your once impenetrable business is being riddled by the pressures posed by Covid-19, closing shop while still riding relatively high may be ideal to maximise returns. A Members’ Voluntary Liquidation is also an effective route for businesses which have reached their natural end due to the likes of owner-retirement which, again, the pandemic has given some contractors pause to consider.
Whatever the situation which has brought you to look seriously at winding-up, the following quick-fire checklist to flipping the ‘off’ switch to your business should help get your end-of-game face on.
Solvency Test – the 'Fortune Teller' for financial health
An MVL provides a formal exit route to solvent businesses with a retained profit of £25,000 or over. If your business is in limbo, straddling between fulfilling expenses to the bare minimum and insolvency, the test will determine whether the business is solvent or insolvent. It is made up of a balance sheet and cashflow assessment, checking if the business has more liabilities than assets. If your business is insolvent, with no prospects of recovery, you will need to seek an alternative liquidation route.
Given the Covid-19 trading climate, many viable businesses have been pushed into temporary financial distress, so it’s essential to carry out a test for insolvency. Take into consideration your prospects, such as your trading potential in light of factors like the pandemic’s latest likely duration; Brexit uncertainty, and perhaps most crucially for PSCs, private sector IR35 reform. And then with each, forecast your profits as a result.
Should I close my limited company before April 2021?
The Entrepreneurs’ Relief cutback announced at Budget 2020 is due to come into force in April 2021, following the government’s decision to postpone the measure from being enforced this year. Although an MVL is typically the most tax-efficient route for a solvent company with healthy reserves, the reduction to the Entrepreneurs’ Relief lifetime allowance (from £10 million to £1 million) is likely to affect a pool of high-grade contractors.
As part of the formal liquidation process, the Entrepreneurs’ Relief tax regime provides a route which allows you to take advantage of Capital Gains Tax at 10 per cent, rather than the higher rate at 20 per cent – assuming you qualify. If your pool of reserves simmers near the £1 million mark, take heed of this change and sell up shop in advance of April 2021, thereby steering yourself away from the possibility of the tax measure taking a larger slice of your cake.
Whispers of CGT modifications
The chancellor instructed the Office of Tax Simplification (OTS) to review Capital Gains Tax to propose ‘simplification’ tactics and assess how CGT currently impacts small businesses. This is likely a red herring, detracting away from Mr Sunak’s real intention to rebalance the scales by aligning taxation between limited company contractors with traditional employment. Although the focus will indefinitely be diverted to recouping the funds distributed through Covid-19 emergency support measures, CGT will likely be used as a tool to facilitate fundraising.
If there is a deadline looming (the next possible date being the Autumn Budget announcement, expected in November 2020), this will directly impact your returns generated through the Members’ Voluntary Liquidation process. So a time limit on the maximum efficiency of the process which contractors rely on when they come to sell their limited companies has all but been imposed.
Chain of impact following MVL
Before you proceed with any commitments to closing your company, assess the implications that the liquidation process would have on your personal life, because as if you’re shutting shop (even if just temporarily), this could close the door to a host of opportunities. If you have a mortgage application riding on your company accounts, for example, it may be best to hold fire on closure (or the process to begin closing). Also consider that, from the perspective of a supplier, trading with a limited company removes limitations which would otherwise be posed to private buyers, so if you’re reliant on a constant chain of equipment, resources and materials, consider the timeframe around your needs. Cutting off your nose to spike your face is a real danger here, so map it all out before you act.
Selling Shop Vs MVL – Is this a common dilemma?
If your business has substantial cash reserves, high-value assets and a robust operational structure, an alternative and cost-effective exit strategy to consider may include selling your business. If you’re prepared to contribute time to prepare your business for sale (as the process is likely to be lengthy), selling your business could generate healthy returns. Depending on your circumstances, your targeted exit date and capacity to navigate the process, diverting from company liquidation to selling your business may generate an attractive return.
With limited company directors specifically, it is common when approaching retirement or looking to redirect their focus to other business ventures to take this route to preserve ‘the bones’ of the business. As this is a genuine reason for sale, it is valued by prospective buyers. You can undergo this process privately or seek advice from an experienced business transfer agent to speed up the process, piggyback from their experience and dodge any unexpected costs.
If your company has ambitious targets, a track-record of operating in a commercially successful manner and is solvent, determine the best time to sell or liquidate your business, taking into consideration the above checklist. By taking the next steps in an informed manner, you can make significant cost savings and help patch the road following your liquidation, whatever that road may hold – hobbies, downtime, pastures new, back to contracting or not.