Options for contractors approaching the end of the road
Written by FCSA Business Partner, SFP Group
If your business is coming up to the end of its lifespan for any reason, you may be wondering what to do with it.
Depending on your circumstances, the three most common options you’ll encounter are:
Members’ Voluntary Liquidation (MVL)
MVLs can be a very tax efficient process for shareholders to withdraw funds from a company upon its cessation, whether this is due to group restructuring, the end of the company’s life, its purpose having been served, or even a shareholders dispute. The company must be solvent and therefore able to pay its debts within 12 months.
Closing down a company through an MVL process would allow you to receive your assets by way of capital distribution – you could then also be eligible for Entrepreneurs Tax Relief. This is a generous government allowance whereby you are taxed at 10% on the entirety of the funds, potentially saving you £1000s.
- The limited company is no longer required
- Company has assets of over £25k (once all debts are paid)
- Director(s) or shareholder(s) is retiring or going back to full time employment
- Company has been trading for at least 24 months
How it works
- The Board swears a Statutory Declaration of Solvency prior to the board meeting, confirming the company will pay all debts owed within 12 months. The board of directors resolve to start the MVL procedure.
- At the shareholders meeting, the Liquidator is appointed and the company is placed into liquidation.
- The Liquidator considers payment of an interim distribution. On average, this will be circa 75-80% of the funds held (less liquidation costs and anticipated creditors’ claims), but the exact amount is dependent per case.
- Notice of appointment must be sent to Registrar of Companies and to creditors within 14 days and 28 days respectively and the Declaration of Solvency must be filed at Registrar of Companies within 15 days.
- After the 21 day period for creditors to submit their claims, the Liquidator will look to agree and pay them. Statutory interest at 8% pa is also payable. The Liquidator seeks confirmation from HMRC that there are no outstanding tax matters.
- Once any creditors have been paid in full and the only outstanding matter is receipt of tax clearance, a further payment typically of 50% of the company’s assets being held is distributed to shareholders. This is normally at around 3 months after the commencement of the Liquidation.
- Once confirmation has been obtained from HMRC that there are no outstanding tax matters, the remaining company assets being held will be distributed to the shareholders. The liquidation is closed and the company is dissolved 3 months later.
Final accounts must be completed to the date of cessation. Final PAYE and VAT returns must be completed and any final corporation tax liability must be calculated by your accountant.
Dissolution will normally be applicable when an MVL provides no real benefit for shareholders and the company has sufficient reserves to cover all of its liabilities. Once the pre-requisite criteria has been satisfied, this route involves applying to the Register of Companies to have the company struck off the register.
Creditors’ Voluntary Liquidation (CVL)
This option could be appropriate for companies who have insufficient assets to cover their liabilities and are classed as technically insolvent.
A CVL is an insolvency procedure in which the directors of the insolvent company are the ones to bring the business to its end. This is a voluntary process and usually comes after a sustained period of financial distress when no turnaround is possible.
- Cash flow problems
- Unmanageable HMRC debt
- Creditors arrears
- Landlord disputes/arrears
- CCJs, winding up petition, CCS or statutory demand
- Bad debt
- Loss of clients
- Director(s) concerned about the viability of the business
How it works
- The Board will hold a meeting to resolve placing a company into CVL and instruct an Insolvency Practitioner to commence and assist with the necessary statutory procedures.
- Following the meeting of the Board to commence the Liquidation process, shareholders will be notified of a general meeting and creditors will be notified using the deemed consent procedure, which advises creditors that the Company will be placed into liquidation and that a liquidator will be appointed on a specific date (Decision Date) unless sufficient objections are received.
- Prior to the Decision Date, creditors will be presented with a Statement of Affairs and Report of the company compiled with the information provided by the director(s). This will set out the financial position of the company, detailing its assets and liabilities, providing estimated realisable values of company assets and a deficiency account.
- At the shareholders’ meeting, which is usually held on the same day as the Decision Date, the shareholders resolve to place the company into CVL and nominate an Insolvency Practitioner of their choice to be the appointed Liquidator.
- On the basis that creditors do not object to the shareholders decision to nominate a Liquidator by 23:59 on the Decision Date then his/her appointment will be confirmed.
- The appointed Liquidator will then take control of the company, realise assets, deal with statutory reporting, carry out his/hers investigations, pay costs of the liquidation and if there are sufficient funds, will distribute these to the amongst the creditors before finalising the liquidation (after which the company is dissolved).
If you’re considering any of these options, speak to a professional adviser and they should be able to assist you in making a decision that’s right for your business.
SFP are an award winning mid-tier turnaround practice which includes one of the UK’s fastest growing MVL departments. They also specialise in CVLs, restructuring and administration.