Members Voluntary liquidation (MVL) v Strike Off – What is the difference?

Since moving into restructuring at AAB, friends and family have asked me: ‘What is an MVL?’ ‘Is an MVL a bad thing?’ ‘Why can’t owners just close businesses themselves?’ These are all very good questions! The restructuring and recovery team... Read more

tax advice

Blog23rd Jun 2022

By Claire Smith 

Since moving into restructuring at AAB, friends and family have asked me:

‘What is an MVL?’

‘Is an MVL a bad thing?’

‘Why can’t owners just close businesses themselves?’

These are all very good questions! The restructuring and recovery team at AAB thought it would be beneficial to discuss the difference between an MVL and a strike off.

What is an MVL?

Firstly, an MVL is a Members Voluntary Liquidation. It’s a formal process entered into to wind up the affairs of a solvent company, meaning the company’s assets are greater than its liabilities, and it can pay debts as they fall due. The shareholders of the Company decide this route.

There may be several reasons for choosing this, such as retirement, a company being set up for a specific purpose and it’s come to the end of its life, or the restructuring of companies within groups.

All things come to an end, so if the time has come to close a solvent company then having peace of mind that the affairs are being handled by a professional, and the remaining assets are correctly distributed to the shareholders, I see this as a positive. I think the word “liquidation” is the reason there may be negative connotations.

It may be time to move onto a new venture, or walk off into the sunset of retirement, so how do you decide between striking off and an MVL?

What is a strike off?

A strike off is an informal way of closing a limited company. Typically, a Company Director deals with the close down and ensures all parties (including HMRC, creditors, employees and shareholders) are aware of the close down, all taxes are paid and filings/procedures are completed. A small fee is paid to apply to Companies House to strike off. Providing all information supplied is correct, the Company would be dissolved after two months.

Should you choose an MVL over a strike off for closure?

There are pros and cons of both processes.

Assets, tax efficiencies & peace of mind

When a business has more than £25,000 of assets to be distributed an MVL is normally the way to go.

A liquidator is appointed which ensures the affairs are wound up appropriately and any remaining liabilities are paid. The liquidator ensures assets are distributed in the correct way.

One of the main advantages is that the shareholders can get the benefit of tax efficiencies, as distributions can be treated on a Capital Gains Tax basis at a rate of 10%, if the shareholders qualify.

Assets can be distributed promptly following the appointment of a liquidator. There is also no limit on the amount of distributions in an MVL and the ability to make in specie distributions means that assets can be distributed directly rather than simply as cash.

In an MVL you get peace of mind that HMRC provide clearance, that acts as confirmation that there are no further taxes or returns due. This means there’s minimal risk for directors since the liquidator deals with all aspects of the MVL.

Fees, time & tax clearance

Now for the disadvantages. There are fees to be paid to the liquidator to deal with the process (costs will depend on the amount and complexity of assets/issues to be dealt with).  The process may take longer than a strike off and requires HMRC approval prior to dissolution.

A strike off can be a quick process and is also very cost-effective (£10 to apply to strike off).

However, there are also down sides. HMRC or other creditors can object to the process. £25k limit applies for any distribution to be under Capital Gains Tax (CGT) rules. If it’s above this amount, then the full distribution will be treated as income and taxed as such.

Unlike MVLs, HMRC don’t always give tax clearance on strike offs. Once dissolved, any remaining assets would transfer to the Crown.

Hopefully, that helps a little in explaining the difference between the two processes.

Summary

Striking Off is better for: MVL is better for:
Companies with less than £25k remaining. Companies with over £25k held or needing assets distributed directly to shareholders.
Companies with no or minimal creditors/tax matters to be resolved. Tax efficiencies for shareholders.
Quick dissolution of Company, without need of Liquidator. Peace of mind.
Receiving HMRC clearance.

If you would like further information about MVLs, strike offs or other restructuring projects, please don’t hesitate to contact Claire Smith or any member of our Restructuring & Recovery team.

By Claire Smith 

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