When a contractor is trading as a limited company, there is likely to be a time when they would benefit from speaking to a Liquidator. This is normally a good thing.
Although the terms Liquidator and Insolvency Practitioner have negative connotations, the advice these professionals give can be of huge financial benefit to contractors.
The most common times when a company director would benefit from speaking to a Liquidator (i.e. an Insolvency Practitioner) is when they are looking to:
- retire; or
- return to full-time employment
and they want to close down their company and take their money out in the most cost-effective way.
The fact that there is money in the company is a reflection on the success that the directors have had with their company. A solvent liquidation – formally known as a Members’ Voluntary Liquidation (MVL) – is often the most tax-efficient way to close down a solvent company and save directors / shareholders thousands of pounds.
By using an MVL the funds to be distributed are subject to Capital Gains Tax, rather than Income Tax. If directors qualify for Entrepreneur’s Relief they can benefit from a 10% marginal rate on distributions. This means there can be considerable tax savings.
The popularity of MVLs
In March 2016 a record number of solvent companies were wound up. There were 2,663 MVLs compared to a monthly average of 768 over the previous year.
This increase was mainly due to company directors reacting to changes in the tax rules which were coming into force in April 2016. As part of these new rules, directors who wind up a solvent company can no longer claim Entrepreneurs’ Relief from the Capital Gains Tax due on any gains if they continue to work in the same trade as that company in the next two years.
While this new rule could be open to interpretation, the intention from HMRC is to stop directors from “phoenixing” their company purely to gain a tax advantage.
The regular MVLs (i.e. for retirement or returning to full-time employment) are likely to remain a popular option for those consultants when the time is right for them to close down their company.
Thanks to the popularity of MVLs in the last few years, contractors should be able to find an Insolvency Practitioner who has a lot of experience with MVLs and can provide the service at a low cost.
A Liquidator can also be of help for a consultant who finds their company has cashflow difficulties.
It is well-known that starting a business is not easy. Figures show that 80% of entrepreneurs who start a business fail within the first 18 months. This can create difficulties for the directors involved, but it doesn’t have to be catastrophic.
A typical situation
Typical situations may include where directors:
- have been trading for a year or so
- have tax bills which they can’t pay
- want to close the company to go into full-time employment
- are nervous about taking the option of ‘dissolving’ their company because they are worried that something could come back to haunt them (e.g. a creditor they had forgotten about).
For these situations, the best option is likely to be for the directors to liquidate their company with an efficient and cost-effective Creditors’ Voluntary Liquidation (CVL) to ensure they meet all of their legal obligations.
An Insolvency Practitioner must be used in these situations; and one of their duties is to conduct an investigation into the affairs of an insolvent company and report on the conduct of directors to the Department for Business, Innovation and Skills. This investigation includes:
- determining what assets can be realised
- conducting a preliminary review of the company’s affairs, Books & Records and minutes for the last 12 months to identify any unusual or exceptional transactions
- seeing if any further recoveries can be made from any persons for the benefit of the liquidated estate.
This investigation is done in every CVL and assures the company’s creditors that everything is done properly.
As a consequence, the directors can be satisfied that any problems will be addressed so that nothing will come back to cause them problems in the future.
An affordable liquidation process
When a contractor finds themselves in a situation where their company is insolvent, their only creditor is normally HMRC due to a tax bill they overlooked and cannot afford to pay.
In liquidation terms, this is a “Basic” CVL. So the contractor should find an Insolvency Practitioner who can liquidate their company at an affordable price and ensure that they acknowledge all of their duties as a director.
This means the director can put the whole chapter behind them, at an affordable price.