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Members voluntary liquidation - Still an effective tax planning tool

20th Feb 2017
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Lifecycle is a new and unique network for accountants.

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Understandably, changes to tax rules as part of the Finance Bill 2016 led to an increase in demand for Members Voluntary Liquidations in the first quarter of last year.

Company owners and their advisors were keen to extract value from a business in the most tax-efficient way before the new legislation came into force on April 6th 2016.

Needless to say, the Liquidation team at Leonard Curtis Business Solutions Group (LCBSG) - provider of the Lifecycle network - processed over 55% of their MVLs in February and March 2016 - ensuring the distributions were successfully made before the deadline.

To recap on revisions to the rules

Revised rules state that distributions to shareholders upon the winding-up of a business are now classed as income - as opposed to capital, which is generally taxed at a lower rate - under the following circumstances:

  • When 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
  • When it is within a period of two years of the distribution and the shareholder continues to be involved in a similar trade or activity; and
  • When the circumstances surrounding the winding-up have the main purpose - or one of the main purposes - of obtaining a tax advantage.

MVLs - still something to consider?

Yes, absolutely. Although MVLs may no longer be as attractive for some, they remain a tax-efficient way of extracting money from a business when it reaches the end of its life - whether that’s due to retirement or sale. 

Distributions in both scenarios are generally treated as capital and therefore taxed at a lower rate than income tax. What’s more, entrepreneur’s relief may still apply to further reduce tax charges.

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

Other benefits that MVLs can bring

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

  • Distribution “in specie” of assets such as property.  Provided they are valued properly they do not need to be turned into cash;
  • Enabling a company to “flush out” any residual claims that the directors are 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
  • Enabling the liquidator to quantify, compromise and ultimately discharge future and contingent claims against the company as part of the process.

And when it is not an MVL

Despite their many remaining advantages, MVLs do not provide the most favourable solutions to certain situations.

LCBSG has been approached in a number of cases by companies anticipating the issue of an Accelerated Payment Notice (APN) in respect of a previous tax planning scheme.  While all cases differ, their general view is that an MVL is not appropriate due to the Declaration of Solvency that directors have to swear. To falsely do so - pledging that the company is able to meet all creditor claims plus interest within the timescales set - could have serious consequences for the directors personally.

Another area in which to exercise MVL caution is where there are group pension schemes. LCBSG recently saw a case where the apparently solvent company was, in fact, liable for one such £multi-million plan!

Adding value and expertise

Whilst many MVLs can be quite straightforward, there can be a number of complicating factors. This is why it is important to take specialist advice before beginning the process. At LCBSG, the specialist MVL team works in partnership with accountants to ensure that the best possible solution is secured for their clients.

Take advantage of the tools available

An area of 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, LCBSG has developed My-MVL.

This easy-to-use specialist software facilitates MVLs for straightforward liquidations - supporting professional advisors who are members of the Lifecycle network by streamlining the entire MVL process for a fixed fee of £2,000 + VAT inclusive of disbursements.

As well as dealing with cash, the software can also deal with overdrawn Directors Loan Accounts, intercompany debtors and tax refunds.

This enables accountants to extend their service lines by offering this specialised, professional and managed service to clients through a 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.

What our clients say

Feedback from those accountants who have used My-MVL has been hugely positive and it has already been developed further in response to suggestions received.

One recent glowing testimonial came from Pete Edwards, Partner at Warr & Co Chartered Accountants, in Stockport, who 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 worth remembering in any discussions with your clients that MVLs remain a very effective tax planning tool.

 

About the Lifecycle network

Lifecycle is a unique network for accountants -provided by the Leonard Curtis Business Solutions Group.

It provides member accountants with a comprehensive range of specialist services - and the expert support required - to improve their client offering at every stage of a business’ lifecycle. From company formation to cessation and all stages in between.

Lifecycle is free to join and also offers members many additional benefits. These include eligibility for a highly competitive Professional Indemnity insurance scheme, a regular programme of free training and education and discounts on products and services relevant to their business and clients’ needs.

Services offered by Lifecycle include: Company secretarial and formation; equity finance for SMEs; debt advisory for SMEs; personal debt advice; corporate restructuring, insolvency and cessation; debt finance for SMEs; cashflow maximisation; property solutions and legal services.

For more information on Lifecycle click here and to become a member of Lifecycle click here or call for free on 03300 242 333.

Follow Lifecycle on Twitter here or email at [email protected].

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