It is commonly believed that Insolvency Practitioners can only assist when a Company is insolvent, or there is another cause for concern. However, Insolvency Practitioners can be called upon for advice and assistance with the voluntary closure of solvent businesses, and the creation of a suitable exit strategy
When might an exit strategy be required?
There are many reasons why a business owner may wish to consider their options and formulate and exit strategy, for example:-
A group of Companies might have a subsidiary (or several) which are no longer performing, or which are no longer required in relation to the group strategy;
The business owner may have experienced some change in personal circumstances which renders then unable, or unwilling to continue their involvement in the business;
The business owner may no longer require the Company as a form of employment, or source of income, or may simply wish to retire from working life.
By creating an exit strategy or a succession plan, the business owner can ensure that they close down the business in the most effective and compliant way.
Why choose the Members Voluntary Liquidation (MVL) Route?
Under the relevant provisions of the Companies Acts, it is possible for a Company to be stuck-off the register where the Registrar has reasonable cause to believe that the Company is no longer carrying on its business. This can be considered as a cheaper option as it does not require the appointment of a Liquidator, or incur professional fees. However, it should not be considered as an option where there are contingent liabilities, or the possibility of any other issues arising.
What does the MVL Process involve?
It is important to note that the process can vary from case to case. In general terms the Directors of the Company will need to be satisfied that the Company is solvent, and specifically that it can pay its debts in full, plus interest, within a period of 12 months. The Directors will then convene a General Meeting at which the Company will pass resolutions to place it into Liquidation and appoint a Liquidator. The Liquidator will then seek to distribute assets to Shareholders as quickly as possible. Such distributions could be made in cash or, alternatively, it is possible to distribute assets ‘in specie’ which means that physical assets are transferred to shareholders.
Tax Implications and Proposed Changes?
A distribution in respect of share capital in a winding-up is a capital distribution, and is not treated as an income distribution for tax purposes. Instead the amount received by the shareholder is treated as the consideration for disposal of shares and is subject to Capital Gains Tax. At present, where the eligibility criteria is satisfied, Entrepreneur’s Relief allows a Shareholder to pay tax at 10% on qualifying assets, instead of the normal rate.
However, Shareholders must be aware that the tax treatment of dividends from limited companies will change with effect from 6 April 2016, with the outcome becoming less favourable.
The upcoming changes stem from the 2015 Summer Budget, when the government announced it would be reviewing the rules relating to company distributions. The review culminated in the new Targeted Anti-Avoidance Rule (TAAR), which will be introduced as part of the Finance Bill 2016, and apply to distributions in winding-up where certain conditions are met.
The measures are intended to strengthen existing rules and prevent tax advantages being obtained when a transaction is carried out where the main purposes (or one of the main purposes), is to obtain a tax advantage. HMRC recently published a policy paper and draft legislation relating to MVL’s and the revised accessibility of Entrepreneur’s Relief. This policy notes that under TAAR, capital distributions from an MVL will be treated as income, under the following circumstances:-
Where an individual, who is a shareholder in a close company, receives from that company a distribution in respect of shares from a winding-up; and
within a period of two years after the winding-up, the shareholder continues to be involved in a similar trade or activity (directly or via an associate); and
the arrangement(s) have a main purpose, or one of the main purposes, of obtaining a tax advantage.
If the recipient of a capital distribution should fall foul of the terms and conditions, that distribution could be retrospectively be classified as income, and therefore subject to the income tax regime. On this basis anyone considering an MVL in the near future should do so before 6 April 2016.