You’re often not just an accountant but a trusted advisor owners and directors turn to when facing pivotal moments.
While you’re accustomed to helping companies grow and thrive, sometimes the most financially responsible decision is for a solvent business is to wind down operations and distribute assets to members.
This is where the Members’ Voluntary Liquidation (MVL) underlines its importance. A structured, tax-efficient, and legally sound process for closing a solvent company and with tax changes coming in April, it’s crucial to understand the benefits it can bring for your clients.
Obviously the idea of simply “shutting up shop” and distributing funds directly seems like the easiest route but an MVL offers more significant advantages, especially when it comes to tax efficiency and director protection.
Why choose an MVL? It’s not just about shutting down
Before telling them the ‘how’, it’s just as important to understand the ‘why’.
They need to understand that an MVL isn’t for distressed businesses – it’s specifically designed for solvent companies that have reached the end of their operational life, for several reasons including:
- Retirement: Your client could be looking to retire and extract value from their successful company’s assets
- Restructuring: Simplifying group structures or consolidating businesses.
- Realising Assets: A company no longer needs to operate to hold assets and wants to distribute them to shareholders in a tax-efficient manner.
Because an MVL is a formal, legal process it offers significant benefits compared to informal wind-downs, primarily around tax efficiency and their peace of mind.
Distributing assets via dividends attracts higher income tax rates while MVLs allow distributions to be taxed as capital gains, which can be significantly more favourable, especially with Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) potentially available.
Furthermore, a formal liquidation provides directors with legal protection and ensures a transparent and compliant closure.
How accountants can be the key to MVL success
The MVL process is structured and relatively straightforward when handled correctly which is where your knowledge and expertise are essential.
The longer these steps take, the more the process is extended with the potential for additional fees as a result.
Here’s a breakdown of the essential steps in an MVL, highlighting what accountants need to be aware of and how they can help at each stage:
- Director’s Declaration of Solvency: The crucial starting point. Directors must formally declare, under oath to a solicitor, that the company is solvent and can pay all its debts within 12 months. Accountants must ensure that the company’s financial position genuinely supports this declaration. Thorough balance sheet review, cash flow analysis, and understanding of contingent liabilities are paramount. False declarations can have serious legal ramifications for directors as they are considered criminal misconduct on their part.
- Shareholder Resolution: Once the solvency declaration is in place, a shareholder resolution is required to place the company into MVL and appoint a liquidator. This usually requires a special resolution passed with a 75% majority. You can assist clients in preparing the necessary documentation and ensuring the resolution is correctly passed and minuted.
- Appointment of a Licensed Insolvency Practitioner (Liquidator): A licensed insolvency practitioner is legally required to oversee the MVL process. The shareholders choose and appoint the liquidator. You can help by advising them on what the liquidator will do and how their fees will be a key cost to consider. The liquidator becomes responsible for realising assets, settling liabilities, and distributing the remaining funds to members.
- Liquidator’s Realisation of Assets: The liquidator takes control of the company’s assets. This involves selling assets (if necessary), collecting outstanding debts if applicable and settling all outstanding liabilities. This includes paying creditors and any other obligations. You can assist your client by ensuring their accurate financial records are readily available for the liquidator, helping to streamline the MVL process, reducing time and costs.
- Distribution to Members: Once all liabilities are settled, the liquidator distributes the remaining assets to the shareholders in accordance with their shareholdings. This distribution is the primary goal of the MVL and where the tax advantages become apparent. The liquidator will provide statements outlining the distributions made.
- Final Meeting and Dissolution: After all distributions are completed, the liquidator holds a final meeting of shareholders. Following this meeting, the company is officially dissolved at Companies House. This marks the legal end of the company.
Understanding the Costs of an MVL: Investing in tax efficiency
While MVLs offer significant benefits, it’s crucial clients understand the costs involved upfront.
The primary cost is the liquidator’s fees. These fees will vary depending on the complexity of the company’s affairs, the value of assets, and the time required to complete the liquidation.
Factors influencing liquidator fees include:
- Company size and complexity: Larger companies with more assets and liabilities will typically incur higher fees.
- Asset types: Complex assets (e.g., property, intellectual property) may require more time to realise, increasing fees.
- Number of creditors and shareholders: More stakeholders can add to the administrative burden.
Many liquidators offer variations of fixed fee MVL packages for simpler cases, providing cost certainty. While cost is a factor, it’s crucial to emphasise to clients that the liquidator’s fee is an investment in:
- Tax efficiency: Potentially saving significant sums compared to dividend distributions.
- Legal compliance: Ensuring the process is legally sound and avoids future issues.
- Director protection: Shielding directors from personal liability and ensuring a compliant closure.
- Peace of mind: Knowing the process is handled professionally and efficiently.
We break down our usual costs involved in an MVL here but stress how they can be reduced by the client and their accountants taking proactive steps.
How else can accountants influence the MVL journey?
Nobody is better placed than you to guide your clients through an MVL by:
- Identifying suitable candidates: Recognising when an MVL is the appropriate and beneficial route for solvent companies. It might not be the right process for them.
- Financial health check: Assessing the company’s solvency and advising on the Director’s Declaration.
- Advising on tax implications: Explaining the potential tax benefits of MVLs compared to other distribution methods including taking advantage of the higher rates of CGT and BADR before they rise in April 2025.
- Assisting with documentation: Preparing financial information and supporting documents for the liquidator.
- Liaising with the liquidator: Acting as a point of contact and ensuring a smooth process for the client, especially involving complex financial questions.
- Explaining costs and benefits: Providing clear and transparent advice on the fees involved and the overall value proposition to them.
It’s always useful to be reminded of your own usefulness!
A recent survey of accountants found that 75% were providing financial advice and business strategy counselling to clients as well as traditional monitoring and bookkeeping services.
Being up-to-date and across efficient and modern insolvency processes like MVLs is a crucial aspect of the modern accountant’s skillset – which we’re confident you are if you’re reading this blog.
If you or your clients want to talk about an MVL or any other aspect of insolvency or restructuring then we’ll be more than happy to chat – especially before those Budget changes come in next month.