Why are HMRC changing the rules on Members Voluntary Liquidations (MVLs)?

In December 2023, everybody was thinking about the upcoming holiday season but HMRC made an announcement in their insolvency guidance that we realised would have significant repercussions for business owners who would like to close their company through a Members Voluntary Liquidation (MVL). 

HMRC said they would no longer provide pre or post tax clearances in MVLs so that professional insolvency practitioners (IPs) would close cases using their best professional judgement. 

The reasoning behind the decision is that there is no current statutory or best practice framework for HMRC to provide tax clearance in such cases. 

Any new guidance will outline the various ways that IPs can gain alternative assurance about the accuracy of the company’s tax liabilities. 

For the pre-liquidation period these include:

  • A sworn legal declaration made by the company’s directors on company assets and liabilities
  • Any HMRC compliance checks that are already in progress
  • Any HMRC claims for pre-insolvency debt

HMRC expects that by assisting with the preparation of the declaration of solvency that IPs should be able to establish an accurate tax position in any event. 

What does this mean for directors?

The positive take from the new process is that it is expected to be much quicker – if shareholders can provide appropriate evidence as required by an Insolvency Practitioner.

This also means that an IP will require more evidence to prove that the company’s tax affairs are fully in order and will likely require assistance and help from the company’s accountant. 

The main details they will likely need access to are:

  • Historic records for additional time periods over and above those previously required. These can include financial statements submitted to HMRC, company tax returns, bank statements etc. 
  • Company accounts up to the date of cessation
  • Details of all taxes the company was registered for
  • Confirmation and evidence that all VAT, PAYE and any other tax schemes have been closed, the company has not participated in any tax avoidance schemes and that any final period tax liabilities have been paid in full. 
  • HMRC statements showing the company’s closing tax position

If, for any reason, the Insolvency Practitioner isn’t satisfied with the level of evidence or confirmations received, they are not obliged to authorise the formal closure through an MVL. 

Chris Horner, insolvency director at BusinessRescueExpert and an experienced IP himself, said: “An MVL is one of the most efficient and effective liquidation methods, exclusively for solvent companies or those that can clear their debts in full within 12 months. 

“The changes from HMRC only underline how important it is to have a clear line of communication and basis of trust between directors and their appointed IP to work through any issues that may arise during an MVL procedure. 

“They should understand why the IP is on their side and look to help them at every opportunity, they will need to be forthcoming, transparent and honest with themselves at every stage and if they are, the process might move even quicker to completion and the realisation of assets than before.”

Members Voluntary Liquidation –  the story of the last five years 

Year  No. of MVLs
2019 8,573
2020 13,056
2021 13,564
2022 9,488
2023 8,958

Figures from the Gazette

The figures of MVLs are compiled by the London Gazette rather than the Insolvency Service because these are voluntary and solvent liquidations and technically not insolvencies. 

Looking at the figures over the last five years, there was a sharp rise in the number of MVL’s during the Covid-19 and lockdown years. 

Many directors and entrepreneurs made the decision to close their business even though there were several support measures available including the furlough scheme and bounce back loans. 

From 2019 to 2020 the number of MVLs increased by 52% with a further increase of 3.8% from 2020 to 2021. This fell back in 2022 and decreased again in 2023 which suggests that many companies that had been viable and solvent in the previous years had run into financial difficulties after Covid once the energy price rise, inflation, rising interest rates and the cost of living crisis began to bite.

In Q1 2024 there have so far been 1,955 MVLs recorded. 

What are the benefits of an MVL?

  • It’s a controlled process 

MVLs are a structured and legally compliant process for an orderly closure. As well as being beneficial for the company and directors’ reputations, they are able to efficiently manage the impact on their employees, suppliers and customers.

  • Tax efficient 

Depending on the circumstances, shareholders and directors could take advantage of potential tax benefits as realised assets or funds could be treated as capital gains and taxed at a lower rate than income tax. Their accountant will be able to go into more detail about what they can expect.

  • Protection for directors 

Unlike in a compulsory liquidation or a creditors voluntary liquidation (CVL) process, there is no risk of any personal liability or investigation into director’s conduct as they have made the decision to close the business themselves. 

There are as many reasons for closing a business as there are businesses. 

Each one is individual and relevant for directors and once the decision to close has been made then the logical next step is to look at what the most effective method would be. 

We offer a free initial consultation to any director or entrepreneur that is thinking of taking the next step in their careers but has to close their current enterprise first. 

One of our experienced advisors will go through all the options available to them and let them decide if they will fit their timescales and future plans or if they need to make changes themselves. 

Get in touch with us today and arrange a chat which will bring your future a step closer and clearer.