John Bell is Founder and Director of insolvency and restructuring firm Clarke Bell. As the infamous IR35 and Off-Payroll regulatory changes of 2021 continue to bite small and mid-sized enterprises, he offers advice for company directors on closing down their business.
The new tax year 2021 was accompanied by the new Off-Payroll legislation. Despite all the controversy and concerns aired by stakeholders that the new tax rules would have a debilitating impact on freelance contractors and consultants, as well as the businesses that hire them, the Government was never likely to U-turn. The new rules also came at a time when the world was still in the midst of a global pandemic and the UK was still in the throes of navigating Brexit.
The three things combined have meant that many self-employed professionals have seen a reduction in business and, in some cases, have seen no work at all as contracts have been put on hold as the hiring firms themselves wrangle with the pandemic and the new legislation.
Those contractors who have been fortunate enough to secure contracts may now be facing late payments which for a one-man band can put a significant strain on a limited company’s bank account / cashflow. As we embark on a new year, some consultants might be considering closing down their limited companies as they pursue other career options.
For a lot of contractors who are considering closing down their limited company, a Members’ Voluntary Liquidation (MVL) is the best option. An MVL is used for winding up the affairs of a solvent company (i.e. one which has no debts).
An MVL is typically used when a company has come to the end of its life and has assets (including cash-at-bank over £25,000). The new Off-Payroll reforms (IR35) could prompt this, as would retirement or taking up a PAYE-role – or any other valid reason for closing a personal service company (PSC).
When is an MVL the best option?
An MVL is an HMRC-approved process, and a licensed insolvency practitioner must be appointed for the liquidation. While it may have a negative-sounding ring to it – with terms like ‘liquidation’ and ‘insolvency practitioner’ – there is nothing negative about it. Quite the opposite, in fact. By placing your company into an MVL it is a clear illustration that you have been running a successful company.
An MVL allows a contractor to draw any remaining profit as a dividend, paying income tax on the dividend amount. With the help of a licensed insolvency practitioner who will liquidate a company, the reserves can then be distributed as capital, which are then subject to capital gains tax (CGT) at either 18% or 28%.
Through an MVL, a contractor can normally take advantage of Business Asset Disposal Relief (this was known as Entrepreneurs’ Relief before 6 April 2020). For anyone who qualifies for this relief, it can mean that CGT will be paid at a rate of 10% on qualifying assets, which can translate into considerable tax savings.
What is needed to get the MVL process started?
Your accountant and insolvency practitioner will guide you through the process step by step. Initially, it is important to apply to Companies House using a DS01 form which contractors will need to complete to start the process to close down a company. Any co-director, such as a spouse, will also need to sign the form.
Before liquidation proceedings can commence, the Insolvency Practitioner would need a number of things completed, including final accounts to be prepared, any creditors to be paid and the final VAT return and Corporation Tax Return to be submitted.
Due to statutory requirements, formal identity checks on each Director and any Ultimate Beneficial Owner of the company will need to be undertaken.
How much does an MVL cost?
Some Insolvency Practitioners are transparent regarding the fees they charge, and make it very clear on their websites. This saves you the time and effort of having to contact the Insolvency Practitioner to find out what they are going to charge you.
There is a wide range of MVL fees charged by liquidators – ranging from around £6,000 to about £800. For some directors, price isn’t really a factor in their decision-making process. They are happy to pay whatever they are charged to put their company into MVL.
However, a lot of directors don’t like to needlessly pay more than they have to. Consequently, the fee a liquidator charges will be a key factor in their decision as to who they will appoint for their MVL. That said, as we all know, cheapest isn’t necessarily best.
Some people worry that a low price means they will get a poor service. However, when a liquidator has completed thousands of MVLs, they will have developed efficient processes which enable them to keep their price low. You always want to be dealing with a firm of insolvency practitioners with professional friendly staff.
How long does it take to get my money from my company in the MVL process?
One of the key issues for shareholders of a company in going into a Members’ Voluntary Liquidation is when will they get their money from their company.
Some liquidators offer to distribute up to 75% of funds on the day they are appointed, with the remainder of the balance paid when the tax clearance has been received. This could be 6 months later.
Others will give shareholders 100% of the funds after 35 days from the date the company is placed into liquidation.
As a shareholder, it is your choice which option you’d prefer and then find the Insolvency Practitioner who can offer that service. We find that most directors prefer to have 100% of the funds after 35 days.
My take-home pay has reduced drastically, and my company is now having cashflow problems. What should I do now?
In the aftermath of Covid-19, as well as the new IR35 rules, a lot of limited company directors are struggling financially. If the company is insolvent and having cashflow problems, a common option is to place the company through the Creditors’ Voluntary Liquidation (CVL) process.
Liquidating a company voluntarily via this method, rather than a compulsory liquidation, is an effective way of protecting the reputation of the directors and dealing with the company’s debts, while fulfilling all the directors’ legal obligations.
When a CVL is the best option, an Insolvency Practitioner will need to be appointed. They will guide the company directors through the process. They will work with the directors, and their accountant (where applicable), to collect all the necessary information to proceed with the liquidation. As soon as the CVL process starts, the company will need to stop trading. A CVL can cost from around £2,000.
Cashflow problems are a huge concern to whoever experiences them. Anyone in this situation should seek specialist insolvency advice straight away and address the problem as soon as possible.
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