What is solvent liquidation?
A Members’ Voluntary Liquidation (MVL) is a quick and straightforward way of ‘winding up’ your solvent business – which means you can – and will need to – pay all taxes due, all creditors and all contractual obligations. An MVL will allow you to extract cash and distribute it in a tax-efficient way.
If you fall into one of these three categories, the most financially rewarding route to closing your business is through a solvent liquidation.
You’re a contractor who wants to release the assets in your company, especially due to IR35 legislation.
You own a company but don’t want to run it any more, or you want to retire.
You have one or more dormant company that’s outlived its usefulness.
The benefits of liquidating a solvent company
If you’re a contractor, the most pressing reason for you to seek a Members’ Voluntary Liquidation is IR35.
IR35 refers to the rules around off-payroll working and deciding whether a contractor is employed or independent, which has huge tax implications for a business. You can learn more about it here.
In anticipation of employers classifying contractors as employed staff to simplify their own tax affairs, contractors with a personal services company (PSC) are looking to minimise their tax bills by ‘winding up’ that company.
The advantages of doing this through an MVL are:
It’s a tax efficient way of extracting cash from the business.
You might qualify for Business Asset Disposal Relief, if you own at least 5% of the shares for at least one year before your MVL.
You can take HMRC’s Employment Status Test to find out whether you really are a contractor or would count as an employee under the new rules.
Sometimes companies simply outlive their purpose. You might have created them for a specific project that’s now finished, or simply want to retire and close your business. A solvent liquidation has significant advantages for directors faced with this situation.
Saving on accounting and audit fees.
Saving time spent preparing statutory compliance information.
Reducing risk to directors.
Improving transparency by simplifying your business’ structure.
Returning surplus assets to shareholders tax efficiently.
Settling inter-company debts.
Transferring assets to new companies without a cash transaction.
The solvent liquidation process
- An MVL can’t proceed without a licensed insolvency practitioner (IP) acting as a liquidator, which is where we come in. We’ll take charge of ‘winding up’ the company, which includes calling all meetings, releasing company assets and paying any creditors.
- Draft a Declaration of Solvency that includes:The declaration must be signed in the presence of a solicitor or notary.
the name and address of the company and the company’s directors
a statement of the company’s assets and liabilities
how long it will take the company to pay its debts (which must be less than 12 months after liquidation).
- Call a general meeting with shareholders no more than five weeks after the Declaration of Solvency is signed, to pass a resolution for voluntary winding up.
- Advertise the resolution in The Gazette within 14 days.
- Send your signed declaration to Companies House within 15 days of passing the resolution. The business will eventually be removed from the Companies House register.