Phil Harris, Senior Management, FRP Advisory LLP
I want to wind down my business as tax efficiently as possible what are my options?
When a company/LLP reaches the end of its useful life, selecting the correct procedure to distribute the reserves back to shareholders as tax efficiently as possible is key. If the company has assets of <£25,000 a Voluntary Strike-off (“VOS”) can be used. Where the assets are >£25,000 it may be more appropriate to place the company into Members Voluntary Liquidation (“MVL”). Using the wrong procedure can result in HMRC treating distributions to shareholders as income (taxed at a higher rate of up to 38.1%) or capital gains (a more palatable 10%, assuming entrepreneur’s relief applies).
VSO is used mostly for dormant companies that own assets of <£25,000 and have no liabilities. HMRC recognised that the costs of MVL may outweigh the tax benefits and enacted Extra Statutory Concession C16 (“ESC16”). ESC16 allows distributions of <£25,000 to be taxed as capital gains.
Members Voluntary Liquidation
MVL is appropriate where a solvent company/LLP has assets exceeding >£25,000 and may also have liabilities to deal with. MVL is a statutory process governed by the Insolvency Act 1986 (as amended). An insolvency practitioner is appointed to realise assets, pay liabilities and distribute to shareholders.
What are the risks?
MVL – The liquidator is responsible for winding up the company’s affairs.
VOS – The directors remain responsible and are personally liable for any breach of process or illegal distributions.
MVL – The Directors are required to swear a Declaration of Solvency and commit a criminal offence if they knowingly swear a false statement.
MVL – The Finance Act 2016 introduced an anti-avoidance rule classifying a distribution via MVL as income if a newco is set up within two years of the liquidated company and carries on substantially the same business with substantially the same ownership.
Tax planning with your financial advisors is essential to maximise the use of available reliefs and accounting periods.