Members Voluntary Liquidation - Still an effective tax planning tool

Members Voluntary Liquidation – Still an effective tax planning tool

The changes to tax rules that were introduced on 6^th April 2016 led to an understandable demand for MVLs in the first quarter of the year as company owners and their advisors sought to ensure that they could extract value from a business in the most tax-efficient way before the new legislation came into force.

As a reminder, the new rules treat distributions to shareholders on the winding up of a business as income (as opposed to capital which is generally taxed at a lower rate) where:

an individual who is a shareholder in a close company receives a distribution in respect of shares in a winding up from the company; and
within a period of two years of the distribution, the shareholder continues to be involved in a similar trade or activity; and
the circumstances surrounding the winding up have the main purpose, or one of the main purposes, of obtaining a tax advantage.

In light of this, it should come as no surprise that the Leonard Curtis Liquidation team processed over 55% of the MVLs for the whole of 2016 in the months of February and March to make sure that the distributions were successfully made before the 6^th April deadline.

However, while MVLs may no longer be as attractive for some people, they remain a tax-efficient way of getting money out of a business when it reaches the end of its life, be that through retirement or sale. Distributions in both scenarios are generally treated as capital, therefore taxed at a lower rate than income tax, and additionally, Entrepreneurs Relief may still apply to further reduce the tax charge.

As evidence of this, we have continued to see a steady flow of MVLs since April 2016.

As well as being a useful tax planning tool, MVLs can also bring a number of other benefits:

provided they are properly valued, assets such as property can be distributed “in specie” therefore do not need to be turned into cash;
the MVL process allows a company to “flush out” any residual claims that the directors have been unaware of and deal with them with finality. Creditors are given a deadline by which to make the claim and thereafter, the remaining funds can be distributed to shareholders. This would also include any liabilities subject to personal guarantees; and
additionally, the MVL process contains a mechanism that allows the liquidator to quantify, compromise and ultimately discharge future and contingent claims against the company.

So while there are benefits of an MVL, there are also some areas that have caused problems for directors considering MVLs recently.

We have been asked by directors of companies that are expecting to be issued with an Accelerated Payment Notice (“APN”) in respect of previous tax planning schemes to see whether an MVL can be used to close the company down before the APN lands. While all cases differ, our general view is that an MVL is not appropriate as the directors have to swear a Declaration of Solvency to say that the company is able to meet all creditor claims including interest within a prescribed period. To falsely swear this document could have serious consequences for the directors personally.

Another area where caution is required is in respect of group pension schemes as we recently saw a case where a company which was believed to be solvent turned out to be liable for the entire pension scheme of a group of companies to the tune of many millions!

So, while MVLs can be quite straightforward in many cases, there can be a number of complicating factors too, so it is important that specialist advice is taken beforehand, both from our specialist MVL team and the client’s own accountant with whom we always work very closely.

One area where we have seen real growth over recent months is in MVLs of simple businesses where creditors have been paid and tax matters have been finalised. To further streamline the process and give accountants more control, we have developed My-MVL, a piece of easy-to-use specialist software to facilitate MVLs for straightforward liquidations. It supports professional advisors who are members of the Lifecycle network by streamlining the entire MVL process for a fixed fee of £1,500 + VAT.

It means that accountants can extend their service lines by offering this specialised, professional and managed service to clients through our bespoke, white-label platform. As a result, they are able to provide an enhanced offering with greater control of the MVL fee and its process. In return, clients benefit from a seamless online documentation journey via a simple, transparent process that can be undertaken remotely, removing the need for face-to-face meetings.

We have received very positive feedback from the accountants that have used the software so far and have further developed it in response to suggestions from our users so that, as well as dealing with cash, the software can also deal with overdrawn Directors’ Loan Accounts, intercompany debtors and tax refunds.

One recent glowing testimonial came from Pete Edwards, Partner at Warr & Co Chartered Accountants, in Stockport. He said: “As an accountant specialising in freelance contractors, My-MVL was the perfect solution for our clients to close a solvent limited company. Prior to its introduction, providing general advice and identifying the most lucrative way to close a company wasn’t compensated. With My-MVL, we find that the modest fee charged by LCBSG allows us to provide a clear, fixed-cost solution and gives us the opportunity to include additional fees for the tax advice we provide. The My-MVL process is simple to use and surprisingly quick – providing clients with email prompts and deadlines in order to expedite the process. Yes, to some degree this is an automated service but it’s truly innovative in terms of client service and satisfaction. My-MVL has received 100% positive feedback from my clients and I would recommend it to any advisor. It gets five stars from me.”

So, with the end of the 2016-17 tax year looming, it’s well worth remembering in any discussions with your clients that MVLs remain a very effective tax planning tool and that the team at LC has a wealth of experience in advising accountants and their clients on the quickest and best way for value to be effectively extracted.