When the owner of a company decides to close down a business, perhaps when they’re approaching retirement, or no longer have a requirement for the business, as long as the business is solvent then they have a couple of options to choose from.
Option 1 – the voluntary strike off
Currently the most frequently chosen option (but perhaps due to a lack of awareness of an alternative), the process is relatively straightforward, but there is a particularly strict criteria which must be met.
Under the process, the directors/ shareholders (members) make an application to Companies House that the company be “struck off”. They must confirm that in the three months before the application, that the company hasn’t traded, or changed its name or disposed of any assets.
The company and its members must also confirm that the business isn’t under threat of liquidation, or has entered into agreements with creditors such as a CVA (an agreement which allows a company to freeze its unsecured debts, agreeing to repay them out of future profits) and therefore be attempting to use the process as a workaround to avoiding creditors.
Directors must pay any outstanding liabilities, dispose of assets, close the bank account and inform members and employees. If any assets are left within the business in the form of a credit, after the date of dissolution, they are considered as belonging to the Crown. Similarly, if the criteria above isn’t fulfilled, any distributions of funds could be deemed illegal, often prompting an investigation in the various affairs of all involved.
If there is no objection given within 2 months, the company is then considered as dissolved. If objections are raised – from creditors say – then the conduct of the directors can come into questions and be investigated. Any surplus cash/ assets are distributed, with any distribution exceeding £25K resulting in the whole amount treated as income, potentially triggering a significant tax liability. However, there is an alternative…
The route of an MVL…
The members voluntary liquidation (MVL) still frightens many directors, with their eyes drawn towards the word liquidation, however in the example above, where the directors no longer require the business, it can be the more appropriate (and more financially viable) route.
As with a striking off, under an MVL it must be “advertised”, allowing creditors to make a claim. However with an MVL, following the advertisement in the London Gazette, creditors are given 21 days rather than 2 months – therefore significantly speeding up the process.
Upon there being no recourse from the notice in the London Gazette, distributions to shareholders can be provided four weeks from the appointment of the Insolvency Practitioner – allowing the shareholders to get their hands on the cash quicker.
The MVL is also a little more flexible than a striking off. During the process of distributing the assets of the business, the members can receive distributions “in specie”. Meaning that rather than liquidating the assets, they can be distributed in their current form – such as property, vehicles, directors’ loan accounts, often the preferred option for many directors.
Moreover, distributions within an MVL are treated as capital, rather than income, therefore a more tax efficient option. Also, if the shareholders are closing the business down, and will not be returning to the same or similar trade within two years, they may also be eligible for entrepreneur’s relief, reducing their tax liability even further.
Which option, when?
In many examples, either of the routes may be applicable, however it’s essential to remember that all assets extracted from the company via liquidation are treated (for tax purposes) as capital. In a voluntary strike off, assets after the first £25,000 are treated as income.
If your company structure isn’t simple, or the directors are higher rate tax payers, or the value of company assets, after creditors have been paid is likely to exceed £25,000 the rule of thumb is that the MVL is probably the more beneficial route.
This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.