What else do you need to know about MVLs?
We’re going to place more focus on Members’ Voluntary Liquidations (MVLs) this December as more directors and business owners are deciding to close their businesses of their own accord before they get into financial difficulties.
Following a consequential Budget statement in October, many are considering the benefits that an MVL can bring including the tax advantages through a generous Capital Gains Tax (CGT) regime through Business Asset Disposal Relief (BADR).
Before we look at some of the other interesting facts and personal advantages that MVLs can bring, it’s important to consider the current state of play.
Recent history of Members’ Voluntary Liquidations
Using data from The Gazette, we can see that in the most recent years the number of MVLs tend to rise when directors consider that the immediate economic future is going to be tough.
As a benchmark, there were 4,207 MVLs in 2019 which rose 42% in 2020. This rose by a further 16% the following year to 6,936.
This fell by 29% in 2022 and barely rose in 2023 but by the beginning of December 2024 the number of MVLs has risen by 27% with one month still to go.
Some surprising facts about Members Voluntary Liquidations (MVL)
We’ve previously covered the fundamentals of MVLs where we cover the basic facts and information that any director would need to consider before seriously thinking about proceeding to close their business through this insolvency process.
Interestingly there are also some additional factors to consider rather than solely concentrating on the personal financial benefits.
- A declaration of solvency is crucial and carries weight. For any company to be eligible for an MVL, it must be able to pay off its debts within 12 months. The business has to be in a position to demonstrate this to the satisfaction of the insolvency practitioner who is overseeing the process on their behalf. This will be done through a declaration of solvency which must be sworn before a solicitor or notary. This legal document details the company’s assets and liabilities, verifying its ability to meet its financial obligations. As this is a legal document, any false declarations would be considered to be a criminal offence, highlighting the seriousness of any decision taken.
- The process can be remarkably quick – if there is shareholder cooperation. A typical MVL process with no significant hurdles can take around ten working days from beginning to end which is efficient in and of itself. However if shareholders are actively engaged in the process then this can be further accelerated as the collaborative approach allows for swifter decision making and can expedite the liquidation.
- Early distribution of assets is possible – with indemnities. In certain situations where all members provide an indemnity, then an early distribution of assets can potentially be made even while creditor claims are being finalised. This indemnity then acts as a safeguard, allowing shareholders to access funds more quickly while ensuring that any outstanding creditor claims are still covered.
- HMRC clearance is no longer a given. In a recently announced change of policy, HMRC announced that they would no longer be providing pre or post-tax clearances for MVLS. This means that the onus shifts to professional insolvency practitioners (IPs) to assess the accuracy of the company’s tax liabilities. Directors now need to provide comprehensive evidence to the IP handling their MVL including historical financial records, tax returns and HMRC statements to ensure a smooth process.
The three most important facts to remember when considering an MVL
There are a lot of considerations when deciding to close your business including choosing an insolvency practitioner to help you through the process.
But there are three key points to bear in mind before you look further down the line towards an MVL:
- The company must be solvent. This is the keystone requirement of an MVL. The company must be able to pay off all its debts within a 12 month period. It’s crucial for directors to ensure that their company meets this criterion before proceeding.
- Tax efficiency. The funds distributed to shareholders are typically subject to Capital Gains Tax (CGT), which is taxed at a lower rate than income tax. Additionally, shareholders may qualify for Business Asset Disposal Relief (BADR), which can further reduce their tax liability. These tax benefits are a significant advantage of an MVL, making it a more attractive option for closing a solvent company than other methods. While discussing an MVL with an insolvency practitioner is important, it can be equally critical to have had conversations with your accountant even earlier in the process.
- A licensed insolvency practitioner has to oversee the process. While the MVL is initiated by the shareholders, it’s still a legal insolvency process and therefore must be overseen by a licensed professional. They will ensure that the liquidation is conducted legally and efficiently, meeting all necessary regulatory obligations. This professional oversight protects the company, directors, and shareholders throughout the process.
There are many other advantages for using an MVL to close a solvent business including tax efficiency, control of the procedure and the preservation of the directors’ reputation, as there is no investigation into their conduct by the Insolvency Service.
Beyond these three key points, it’s important to remember that there may be several other factors that can influence your decision on whether or not to proceed with an MVL.
One of our advisors will be able to help you assess your company’s situation, advise on the potential benefits and drawbacks of an MVL or any other insolvency process depending on the circumstances and ultimately guide you through the entire process.
The first step is to get in touch!