Members Voluntary Liquidation Tax: How it Works

In the case of a company voluntarily choosing to wind up their operations, one of such options available to them is that of the member’s voluntary liquidation, wherein a company of solvent capacity and without outstanding liens or legally binding motions is closed by the decisions of its constituent members.

Member’s voluntary liquidation is considered among one of the most tax efficient methods of voluntary company dissolution and as such is often one of the first options for such a situation – though this is not to say that member’s voluntary liquidation does not have a cost and its own set of drawbacks.

Member’s voluntary liquidation and its subsequent taxes are considered an excellent option in the case of a company’s liquidation due to the relatively low percentage of tax that is placed on the assets and funds withdrawn from the solvent company to be liquidated.

What is Members Voluntary Liquidation?

what is a voluntary liquidation

Member’s voluntary liquidation, otherwise abbreviated to MVL, is a legal motion performed for the purposes of ending the affairs and operations of an otherwise legitimate and solvent company.

Marchford – a team of closure specialists – note that the primary purpose of a member’s voluntary liquidation is the subsequent distribution and administration of company assets and funds to its members prior to the company being removed or “struck off” in the companies house department of the government.

Like all large scale transfers of wealth and assets, the dissolution of a company with distributable funds and corporate assets is subject to taxation, both in terms of a percentage and in a gross amount usually set by the volume and value of said distributable company assets.

How is a Members Voluntary Liquidation Performed?

Apart from making the appropriate consensus and decisions to liquidate and otherwise cease operations of the company, the director or directors must declare that said company is in a state of solvency and is otherwise capable of paying back their creditors and other liabilities within twelve months or sooner.

Apart from this, the company must appoint a licensed insolvency practitioner or similar certified professional liquidator so as to ensure that no area of the liquidation proceedings is overlooked and in order to facilitate the disbursement of funds and assets once the dissolution process has been completed.

From this point onwards, the liquidator and their agency (if not a solo contracting liquidator) will notify the companies house and other concerned parties of the company’s desire to cease operation and of the subsequent liquidation of its assets.

As is true to their job title, the liquidator will liquidate said assets once the appropriate parties have been notified and subsequently distribute the funds or other financial materials to the proper individuals, as well as pay back any liabilities or creditors if such circumstances are the case.

Is Members Voluntary Liquidation Cheaper for Taxes?

Yes – member’s voluntary liquidation is considered the most efficient method of liquidating and dissolving a solvent company in terms of taxation, wherein any funds or assets withdrawn from the shut down company will be considered beneath the business asset disposal relief clause and as such only subjected to a measly 10% tax rate.

This, of course, is in addition to the annual exempt amount that is applicable to every form of capital gains within the threshold set on an annual basis, and as such said threshold amount will not be factored into the tax percentage calculation during voluntary liquidation.

What is Business Asset Disposal Relief?

Business asset disposal relief is a relief clause that reduces the capital gains tax rate of any capital gains distribution from the sales, liquidation or other methods concerning a company entity.

In relation to member’s voluntary liquidation, this can equate to outstanding shares and liquidated assets only being subjected to a ten percent taxation rate as is the standard for any funds being withdrawn from a company beneath business asset disposal relief.

To qualify for this, however, the company must have been established and trading for two years at the minimum, as well as the fact that any assets of said business must be liquidated or disposed of within three years of the filing.

How and why is a Liquidator Acquired for Voluntary Liquidation Proceedings?

Liquidators may either be appointed by a governing entity, in a court of law, or externally hired from a firm by the dissolving company itself – as is the case in member’s voluntary liquidation.

The appointing of a professional liquidator is a requirement in the processing and completion of a member’s voluntary liquidation proceeding, as the liquidator will both legally ensure that no wrongdoing or illegal practices occur as well as ensure that the company’s affairs are entirely in order so as to prevent any problems from interrupting the MVL process.

Finally, the appointed liquidator will also be responsible for the disbursement of funds and company assets once the member’s voluntary liquidation procedures have been completed

How Much is Members Voluntary Liquidation Tax?

If qualified for business asset disposal relief via the route of capital gains, the tax rate is set at a solid ten percent of any money or assets withdrawn from the now closed company.

This, of course, does not include the tax free annual exempt amount within the capital gains tax threshold.

The business asset disposal relief tax rate is only applicable to member’s voluntary liquidation, however, as other routes of closing companies down such as company dissolution or insolvent voluntary liquidation do not qualify for capital gains tax relief beneath business asset disposal relief.

Are there Other Fees Involved in Members Voluntary Liquidation?

Apart from the compulsory tax rate that is subtracted from any funds withdrawn from the closed company, several other fees are applicable in the process of member’s voluntary liquidation, adding to the total cost of performing a member’s voluntary liquidation.

The first and most compulsory among these fees is the monetary compensation given to the insolvency practitioner or licensed liquidator for their services, of which will likely be variable depending on the size of the company, the complexity of the proceedings and the hours said liquidator spends on said case.

Other fees encountered during member’s voluntary liquidation are that of the public notification of the company’s closure in the Gazette, as well as several miscellaneous processing fees in concerns to the HMRC, companies house, court of law (if applicable) and liquidator agency.

What is Phoenixing and the TAAR Law?

Only recently brought into fruition, the TAAR or targeted anti-avoidance rule is a tax rule that changes the status of any funds or assets received from a liquidated company to that of income instead of capital, at least in the eyes of taxation agencies.

This, however, is not entirely applicable to every liquidation of a company, as this change in disbursement taxation is only applicable in the case of phoenixing, suspected tax avoidance, if the recipient is a stockholder in the liquidated company with a total stake of over five percent and that the liquidated company is legally considered closed or shut down.

All four of these factors must be encountered in a single case for the targeted anti-avoidance tax rule to apply to the recipient and their subsequent liquidated fund disbursement, of which will essentially invalidate the benefit of the business asset disposal relief and its capital gains tax threshold of ten percent.

In order to avoid this from occurring, it is important for the recipient to avoid phoenixing, a practice wherein they will conduct trade or operate a business similar in operation and name to the closed company that is disbursing liquidated assets.

Other methods to prevent the TAAR from interfering with the member’s voluntary liquidation tax is to conduct business and tax proceedings in a clear and communicable manner as well as to contract the services of a tax specialized audit firm so as to avoid making any blunders that may be misconstrued as tax avoidance or phoenixing.

References

1. Adam Hayes, Chip Stapleton. (May 30 2021) “Voluntary Liquidation” Investopedia Investopedia Corporate Finance and Accounting Retrieved on Feb 6 2022 from www.investopedia.com (https://www.investopedia.com/terms/v/voluntary liquidation.asp#:~:text=A%20voluntary%20liquidation%20is%20a,a%20court%20(not%20compulsory).)

2. Unknown Author. (N.D.) Australian Securities and Investments Commission. “Illegal Phoenix Activity” Retrieved on Feb 6 2022 from asic.gov.au (https://asic.gov.au/for-business/small-business/closing-a-small-business/illegal-phoenix-activity/)

3. E.Han Kim, John D. Schatzberg, Voluntary corporate liquidations, Journal of Financial Economics, Volume 19, Issue 2, 1987, Pages 311-328, ISSN 0304-405X, https://doi.org/10.1016/0304-405X(87)90007-9. (https://www.sciencedirect.com/science/article/pii/0304405X87900079