There are a number of avenues that you could follow if you wish to close a solvent company. However, the most appropriate one for you depends on a number of factors, particularly concerning the company’s asset status and tax planning arrangements. Two of the most common methods are either via dissolution of the company or through a Members’ Voluntary Liquidation (MVL).
Is Your Company Solvent?
The first step when closing a company is to establish whether or not it can be legally classed as solvent. To be deemed solvent a company must be able to do the following within 12 months of closing:
- Fully pay its current liabilities.
- Pay any interest it owes.
- Pay any contingent liabilities that may become due, such as compensation payments from court cases or employment tribunals which are still ongoing at the time of closure.
The value of the company’s assets must also exceed the total of its balance sheet liabilities. If your company meets all of these requirements it can then be closed either via dissolution or via an MVL.
Voluntary Dissolution of a Solvent Company
This route is often chosen for companies who have little or no assets in the business. It is also often preferable for companies which are no longer active and are unlikely to be required again in the future. However, if the company may need to be resurrected in the future then keeping the company dormant may be a preferable option. Companies can be kept dormant indefinitely providing basic reporting requirements are maintained.
A company can be dissolved and thus struck off the register held at Companies House only if it hasn’t traded, sold off any stock, or changed its name in the last three months.
Features of Dissolving a Solvent Company
There are a number of features to be taken into account when considering dissolving a company:
- Cost effective – in some cases you can apply to have a company removed from the Companies House register by simply submitting a DS01 form or completing the application online and paying an £8 charge.
- Bona Vacantia – once a company has been dissolved any remaining assets pass to the Crown in a state termed ‘bona vacantia’ which means ownerless property. To avoid losing assets this way, prior to the dissolution any distributable capital should be divided between the shareholders and a Capital Reduction process should be employed to extract any remaining non-distributable assets.
- Tax Concerns – HMRC has imposed a limit of £25,000 on the total amount of assets that can be distributed as capital, rather than income, for tax purposes before the dissolution of a company. If assets total more than this then an MVL may prove a more tax efficient process.
- Director Liability – If a directors fails to adhere to the rules surrounding the voluntary dissolution of a company, especially if the company is later found to be insolvent, then the director can be held personally liable and subject to fines, director disqualification or prosecution.
Members’ Voluntary Liquidation (MVL)
An MVL must be undertaken by a licenced Insolvency Practitioner (IP) and is generally suitable for companies that have more complex structures or assets over £25,000. The appointed IP will work to realise and then distribute these assets to the company’s members.
To engage in an MVL the following conditions must be met:
- At least 75% of the shareholders must agree to the process.
- The directors of the company must sign a sworn Declaration of Solvency, relating to the conditions of solvency mentioned above.
Features of Members’ Voluntary Liquidation
There are a number of important features to be taken into account when considering closing a company via an MVL:
- Cost – Due to the higher levels of professional fees involved in an MVL, they can be significantly more expensive than simply dissolving a company. However engaging the services of knowledgeable and licenced insolvency practitioner is likely to result in any assets being distributed in a much more tax efficient and profitable manner.
- Timing – An MVL is normally a relatively quick process and as the timing is under the control of the shareholders, it can be planned to tie in with the most tax efficient periods of the year.
- Director Liability – There is a much lower level of risk to directors as the IP will handle all proceedings and ensure full compliance in regards to confirming the company’s solvency.
- Tax Efficiency – Under an MVL any capital extracted from a company will be taxed under Capital Gains Tax rules rather than it being taxed as income if it had been extracted via dividends. In some cases this may also be eligible for Entrepreneurs’ Relief which can reduce tax liabilities even further, from 18% to 10% for the first £1 million.
If you are looking to close your company then we would recommend getting professional advice as to which would be the best option for you. Begbies Traynor Group provides practical advice and closure services to company directors. We will take the time to fully understand your company and your motivations for closing it. Contact us to find out more or to arrange a free meeting with one of our regional offices.