Profit Extraction and Winding Up:
A Members’ Voluntary Liquidation (“MVL”) is a process of closing a solvent company, enabling shareholders to withdraw the remaining cash and other assets before dissolving the company. The distribution of these assets is treated as a capital disposal of the shares in the company, so that Entrepreneur’s Relief may apply with the beneficial 10% rate of Capital Gains Tax.
Distributing assets in excess of £25,000 without an MVL will lead to income tax treatment and dividend tax rates will apply. The higher tax rates on dividends mean that it will be more tax efficient for most shareholders to receive capital treatment. A licensed insolvency practitioner must be appointed to oversee the MVL.
On 9 December 2015, HM Revenue & Customs issued a consultation document proposing changes in legislation from 6 April 2016. The consultation will end on 3 February 2016.
The consultation looks at capital distributions in a number of different situations. Regarding MVL’s, the consultation is targeted at:
- a company retaining profits in excess of their commercial needs so that cash can be extracted at favourable capital gains tax rates rather than dividend tax rates;
- phoenix companies, where a new company is set up shortly after dissolving the original and the new company conducts substantially the same trade;
- special purpose companies which are wound up after the end of a project or contract.
Once the consultation has ended and final legislation has been published, there will only be a short amount of time before the new legislation will come into effect on 6 April 2016. Anyone considering an MVL therefore should think about commencing proceedings sooner rather than later.
Also, given the additional uncertainty introduced by the proposals, we strongly recommend that professional advice is taken before commencing an MVL.
If you require advice in this area please contact our Business Recovery and Insolvency Director, Mark Botwood, who is a licensed insolvency practitioner. If you have a query over the tax implications of an MVL then please contact our Tax Director, Jenny Marks.
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