Members’ Voluntary Liquidations: A tax efficient way to call time on your business?

This article was first published in South West Business Insider

The voluntary liquidation of a solvent company can be an attractive way to crystallise value, but there are tax and other issues to consider

In these uncertain times, it’s perhaps unsurprising that many business owners are looking at the economic downturn and deciding to sell or retire earlier than originally planned.

Rising costs, soaring energy bills and labour shortages are among the factors leading some to conclude it’s time to exit their business and maximise their returns before reserves built up during the good times are depleted.

 At PKF Francis Clark, we’ve seen increasing interest in Members’ (Solvent) Voluntary Liquidations (MVLs), which can be a tax efficient way of extracting value from a business.

Tax rates

The distribution of value to shareholders from a company in liquidation is usually taxed as a capital gain. Despite predictions to the contrary, the Autumn Statement did not introduce any increases to capital gains tax rates, and the current 20% rate – coupled with the potential availability of Business Asset Disposal Relief to reduce the rate to 10% on the first £1 million of lifetime gains – is relatively low.

The rules need careful consideration if owners are not retiring completely.

On the other hand, corporation tax rates are increasing to 25% from April 2023 and dividend rates for extracting profits from a company remain high (up to 39.35%, with the tax-free annual allowance halved to £1,000 from next tax year and again to £500 in 2024).

All these factors, coupled with uncertainty about what the future holds, mean crystallising the value built up in a business could be an attractive option.

Anti-phoenixing rules and other issues

From a tax perspective, there are a number of issues to be wary of. In particular, there are ‘anti-phoenixing’ rules which tax any extraction of value at dividend rates (rather than as a capital gain) if the business owners are subsequently involved in the same kind of trade within two years and there is a tax avoidance motive to the MVL. These rules need careful consideration if owners are not retiring completely.

Other issues that could impact a sale or wind-down of a business include:

• Employee compensation payments and pension schemes
• Early termination provisions on leases and other contracts
• Warranty issues and guarantees given to customers or other stakeholders
• Rent break dates and potential dilapidation costs
• Outstanding insurance or litigation issues

This list is not exhaustive, and it’s important to take early advice before making any decisions.

Find out more about PKF Francis Clark’s specialists in Business Recovery and Tax Advice for Businesses.