What is an MVL?

Owning a limited company is a popular option for many contractors in the UK.

It allows you to be in control and manage your operations and money how you see fit. It’s easy to see why despite IR35, many contractors in the UK continue to opt for limited company formation.

But if you’re now in the position where you feel it is time to close down your limited company, you must follow the correct processes and procedures.

This will ensure that you don’t damage your future financial and trading prospects.

What is an MVL?

An MVL is a Members’ Voluntary Liquidation.

MVL is a positive option for closing down your solvent limited company, and releasing the money tied up in the company in the most tax-efficient way.

By processing an MVL, you are showing that your business has been successful and well-managed throughout its lifetime.

When is an MVL available?

An MVL is an option available to solvent companies.

And in order for your company to be solvent, you must be able to pay off all your outstanding liabilities and debts.

The MVL process is carried out by an Insolvency Practitioner (IP) and can be completed in 3-6 months. It involves settling all outstanding debts and related interest. This will include paying off creditors in full and settling any legal matters and disputes.

All payments will be made from your company profits and the sale of your company assets. Any leftover funds after payments have been made will be distributed between you and any other company members.

The MVL process ultimately results in you releasing money tied up in your company, and it is closed down and no longer able to legally trade -- otherwise known as ‘dissolved.’

Do I qualify for an MVL?

You qualify to apply for an MVL if:

· You no longer wish to trade from your company and it is solvent.

· Your company has net assets of £25,000.

· Your company has been trading for 24 months.

What are my other company liquidation options?

There are other options available to you when closing down your limited company.

• CVL

A Creditors’ Voluntary Liquidation (CVL) is an option available to companies that are in financial distress. If you can no longer meet the financial obligations of your company it is classed as ‘insolvent.’

A CVL is the best course of action to ensure that your insolvent limited company is closed down in a professional and controlled manner for you and your creditors.

• Strike off

Another option to close down your solvent limited company is by doing a strike off or ‘dissolution.’ A strike off will only cost a small fee of £10 to Companies House but you will need to pay tax on all your company assets.

While a strike off can seem tempting due to its simple process and small fee, if you have over £25,000 once all your debts and liabilities have been paid, then an MVL can return more of your cash back to your pocket through tax benefits.

What are the benefits of an MVL?

An MVL can offer various positives to limited company contractors in the form of taxation benefits.

The major benefit of an MVL is that you could be eligible for Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief). This government allowance can save you £1000s by taxing you at a fixed 10% on all your company assets (which is not available with any other liquidation option).

An MVL also offers fast release and distribution of your company’s net asset value. In some instances, your IP can release up to 100% of your company’s net asset value within 7 days of liquidation.

So as well as tax advantages, you can be sure that your contracting company has been closed correctly and legally. If any creditor issues arise, the IP can deal with them quickly on your behalf.

MVL versus Strike off

MVL and strike off are both options available to you if you have a solvent limited company.

Here we have an example of the two options compared:

Mr Peters has a successful contractor limited company. His business has been trading for the last 2 years. He is now in a position where he would like to retire and no longer needs his limited company business. He is the sole shareholder/owner; has £50,000 in the bank and is VAT-registered.

There are two main options open to Mr Peters.

Option 1:

Strike off the company. By doing this, Mr Peters’ £50,000 would be taxed at 33.75% (taxed on the shareholder as dividends), costing him £16,875.

Companies House charge an additional administration charge of £10, leaving him with £33,115 in the bank.

Option 2:

An MVL. With an MVL, Mr Peters would benefit from Business Asset Disposal Relief (BADR), resulting in tax of only 10%, once the IP’s fees have been deducted.

Based on the assets of £50,000, a typical IP’s fee will be around £2,000 plus expenses and VAT. The expenses and IP fee would total £2,396.09 plus VAT (£479.22).

If the company is VAT-registered, the VAT can be reclaimed back by the IP and distributed to Mr Peters and added to the total saving.

The fees of the Insolvency Practitioner are then deducted before the BADR of 10% is applied, so in this case the fees (£2,396.09 are subtracted from the assets (£50,000) which leaves £47,603.91. This amount would then be taxed at 10% = £4,760.39

So, by using the MVL the total cost would be £7,156.48 (£2,396.09 + £4,760.39). This option will result in Mr Peters receiving a total of £42,843.52 after liabilities and taxes paid to HMRC, leaving him £9,728.52 better off than a company strike off.

As you can imagine the higher the net asset balance, the higher the saving.

Looking at the example above, you can see the key difference in the contributing factors that make up the saving using an MVL is the 10% tax rate utilising Business Asset Disposal Relief.

What is the MVL process and how long does it take?

An MVL will normally take around 3-6 months to complete from start to finish.

So you know what’s involved, here are four major milestones of the MVL process:

1. Appointing an Insolvency Practitioner

To begin the MVL process you will need to instruct an IP.

The IP will take care of the MVL process for you including the payment of debts, liabilities, and distribution of leftover funds.

You cannot complete an MVL without an Insolvency Practitioner.

2. Declaration of Solvency

The majority of all company directors (unless there are 2 or fewer, in which case both directors need to swear a declaration), will need to swear a declaration of solvency.

This is a legal document stating that your company is solvent and can repay all its debts and liabilities within 12 months of signing the declaration.

3. Liquidation Process

Once the liquidation process begins, the IP will notify Companies House and HMRC of your intention to close down your limited company.

As closing down a limited company is a matter of public record an announcement will be made in The Gazette -- once all the final documents have been filed by the IP. During this stage, all creditors will be invited to make claims for outstanding money owed.

4. Removal of the Company from the Register

Your company will then be removed from the register at Companies House and will no longer exist or be able to trade.

Why do I need an Insolvency Practitioner (IP) for an MVL?

Without instructing an IP you cannot proceed with an MVL.

Your IP will essentially take control and coordinate the whole MVL process.

What your IP will do:

• Help prepare the Declaration of Solvency
• Realise company assets
• Pay creditors
• Report on MVL progress
• Settle legal disputes
• Distribute leftover funds to all company members

Finally, here's why contractors use MVL…

Whatever your reasons for closing down your limited company it is a big decision.

There can be many reasons for you wanting to close down your limited company. Maybe you wish to retire, return to employment or your company has fulfilled its purpose.

Regardless of your reason, if you are a solvent limited company that has been trading for at least 24 months, with a minimum of £25,000 in net assets, embarking on an MVL is a very tax-efficient way of releasing cash tied up in your limited company.

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Contractor UK has partnered with SFP one of the UK’s leading MVL providers. SFP’s award-winning liquidations team are the preferred choice of contractor accountants across the UK. Their team of professional MVL practitioners are on hand to guide you seamlessly through the MVL process. You can be sure you are in safe hands with SFP!

If you are ready to take the next steps towards an MVL then visit our MVL page

To find out more about SFP and their MVL service visit our website