For the vast majority of businesses, particularly those with annual sales greater than £100,000, operating through the medium of a limited liability company is the most popular choice. It almost eliminates personal liability for business debts and creates a more favourable tax regime when annual profits exceed about £50,000. Indeed, recent Government statistics estimate that there are over 5.6 million limited liability companies registered in the UK of which more than 3.1 million have a sole owner.
If you are running a business and decide to retire, or perhaps sell the assets held within the company rather than the company shares, steps are required to extract the cash/assets. Similarly, if a personal services company ceases operating activities (the introduction of IR35 created a large number of cases in this category in North East Scotland ) the cash/assets that remain within the limited liability company framework require to be released as tax efficiently as possible.
A solvent liquidation process, known as a members voluntary liquidation “MVL” may be the answer. The main reason for making this statement is tax driven. If Business Asset Disposal Relief “BADR” applies, the recipient of cash from a company as a result of an MVL process will find that the first £1 million is taxed at 10%, with anything more taxed at 20%. As a quick example, a person receiving £100,000 by way of a capital distribution from an MVL process might expect to pay about £9,500 tax which is contrasted with more than twice this sum if the monies are taken as a dividend, and more than three times this sum if the money is paid by means of a salary.
In general terms, qualifying for BADR means that, amongst other criteria, the person must have been active in the company (director/employee), held at least 5% of the voting share capital in the continuous two year period leading up to the time that the company is subject to MVL, and receive the cash within three years of ceasing the company’s business activity.
As one might expect, there are some anti-avoidance provisions in order to stop a person accumulating cash in a company and instructing an MVL after, say, three years in order to withdraw the cash and pay tax at 10% rather than income tax at one’s highest rate on a salary, and then repeating that cycle. Unsurprisingly, HMRC have thought of this possibility and will levy tax at the more punitive income tax rates if a person receiving a capital distribution from an MVL becomes involved in the same industry in an ownership/management capacity within two years of receiving such distribution. Clearly, if a person is retiring, there is no difficulty in being able to state that such person will not be involved in the same industry in an ownership/management capacity.
The purpose of an MVL is to distribute monies to shareholders but, if desired, it is perfectly permissible for the liquidator to transfer company assets e.g. a building, book debt or vehicle, to shareholders rather than selling them. As the transfer is undertaken at fair value and wholly transparent, there is no problem.
When appointed liquidator, such person must take steps to ensure that all liabilities are known/settled before cash is paid to shareholders. This is one reason why the law expects the liquidator to advertise the liquidation because it may be the only time that a creditor is aware of the intention to close the company and have it dissolved. In one case, a solicitor telephoned me indicating that, upon seeing the notice of liquidation, two former employees of a joinery business contacted him because they were suffering from life-shortening breathing difficulties as a result of working for such company. The fact that the company was subject to an MVL meant that cash was available and hence, the prospect of a successful claim arose. The matter was dealt with but it was interesting to note that the directors of the company were unaware of the potential claim because trading had ceased many years earlier with no comment made by the former employees at that time.
The law provides that if a company’s assets exceed £25,000, a licensed insolvency practitioner must be appointed for an MVL to proceed and, in general terms, the cost of doing so is far outweighed by the tax benefits. As with all tax planning and tax saving matters, one’s usual accountant tends to be the first place to seek advice, which will often lead to the door of the licensed insolvency practitioner on the basis that an MVL makes sense.
For the nine year period up to March 2020, the lifetime allowance was £10 million. This was reduced to £1 million at that time. How much longer the Chancellor will keep it at £1 million is anyone’s guess.
This article is written by Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, Aberdeen. The views expressed in this article are his rather than those of the firm.