John Bell is director of licensed insolvency practitioners Clarke Bell, which specialises in providing advice and help to contractors. He talks to IWORK about the steps contractors need to take if they are considering giving up contracting and what their best options are.
I am giving up contracting. What are my first steps?
First and foremost, talk to your accountant and put them in the picture about your plans. Your accountant will probably urge you to get in touch a licensed insolvency practitioner – most of whom will offer you a free initial call to talk through your options.
What are my options for closing down my limited company?
For a lot of contractors who are considering closing down their limited company, a Members’ Voluntary Liquidation (MVL) is the best option. An MVL is used for winding up the affairs of a solvent company (i.e. one which has no debts).
An MVL is typically used when a company has come to the end of its life. The new Off-Payroll reforms (IR35) could prompt this, as would retirement or taking up a PAYE-role – or any other valid reason for closing a personal service company (PSC).
The alternative to an MVL is a voluntary company strike off but a strike off request could be turned down by Companies House if a business has creditor agreements in place, has traded over the last three months or has changed names over the last three months. An MVL may be more appropriate.
When is an MVL the best option?
An MVL is an HMRC-approved process, and a licensed insolvency practitioner must be appointed for the liquidation. While it may have a negative-sounding ring to it – with terms like ‘liquidation’ and ‘insolvency practitioner’ – there is nothing negative about it. Quite the opposite, in fact. By placing a company into an MVL it is a clear illustration that someone has been running a successful company.
An MVL allows a contractor to draw any remaining profit as a dividend, paying income tax on the dividend amount. With the help of a licensed insolvency practitioner who will liquidate a company, the reserves can then be distributed as capital, which are then subject to capital gains tax (CGT) at either 18% or 28%.
Through an MVL, a contractor can also take advantage of Business Asset Disposal Relief (this was known as Entrepreneurs’ Relief before 6 April 2020). If someone qualifies for this relief, this can mean that CGT will be paid at a rate of 10% on qualifying assets, which can translate into considerable tax savings. Each shareholder of the limited company could also benefit from a tax-free allowance of £12,300, the Annual Exempt Amount. If there are multiple shareholders, this can be highly efficient.
What happens in the MVL process?
Your accountant and insolvency practitioner will guide you through the process step by step. Initially, it is important to apply to Companies House using a DS01 form which contractors will need to complete to start the process to close down a company. Any co-director, such as a spouse, will also need to sign the form.
Any shareholder, creditor, trader, insurance company and bank will need to know about the plan and be sure that a contractor has no outstanding payments due to HMRC, such as Corporation Tax, VAT, NICs and, if applicable, PAYE. All paperwork should be sent to HMRC along with a final set of accounts from the date of a contractor’s last set of accounts to the final trading day. Contractors must also inform HMRC to cancel any VAT registration, which could take up to three weeks to be confirmed and submit a final company tax return which covers the period from the last tax return to the final day of trading, taking account of VAT on stock and business assets.
How much does an MVL cost?
Some Insolvency Practitioners are transparent regarding the fees they charge, and make it very clear on their websites. This saves you the time and effort of having to contact the Insolvency Practitioner to find out what they are going to charge you.
There is a wide range of MVL fees charged by liquidators – ranging from around £6,000 to about £800.
For some directors, price isn’t really a factor in their decision-making process. They are happy to pay whatever they are charged to put their company into MVL.
However, a lot of directors don’t like to needlessly pay more than they have to. Consequently, the fee a liquidator charges will be a key factor in their decision as to who they will appoint for their MVL. That said, as we all know, cheapest isn’t necessarily best.
Some people worry that a low price means they will get a poor service. However, when a liquidator has completed thousands of MVLs, they will have developed efficient processes which enable them to keep their price low.
When an Insolvency Practitioner is dealing with a large volume of liquidations, they are likely to have obtained a reduced price for the disbursements in an MVL. They should be charging the disbursements at cost, which will keep the cost of the MVL down.
Also, when an Insolvency Practitioner has low overheads, this should be reflected in their fees.
How long does it take to get my money from my company in the MVL process?
One of the key issues for shareholders of a company in going into a Members’ Voluntary Liquidation is when will they get their money from their company.
Some liquidators offer to distribute up to 75% of funds on the day they are appointed, with the remainder of the balance paid when the tax clearance has been received. This could be 6 months later.
Others will give shareholders 100% of the funds after 35 days from the date the company is placed into liquidation.
As a shareholder, it is your choice which option you’d prefer and then find the Insolvency Practitioner who can offer that service. We find that most directors prefer to have 100% of the funds after 35 days.
My take-home pay has reduced drastically, and my company is now having cashflow problems. What should I do now?
In the aftermath of Covid-19, as well as the new IR35 rules, some limited company directors are struggling financially. If the company is insolvent and having cashflow problems, a common option is to place the company through the Creditors’ Voluntary Liquidation (CVL) process. Liquidating a company voluntarily via this method, rather than a compulsory liquidation, is an effective way of protecting the reputation of the directors and dealing with the company’s debts, while fulfilling all the directors’ legal obligations.
When a CVL is the best option, an Insolvency Practitioner will need to be appointed and they will guide the company directors through the process. They will work with the directors, and their accountant (where applicable), to collect all the necessary information to proceed with the liquidation. As soon as the CVL process starts, the company will need to stop trading. A CVL can cost around £2,000.
Cashflow problems are a huge concern to whoever experiences them. Anyone in this situation should seek specialist insolvency advice straight away and address the problem as soon as possible.