Closing a Solvent Business That Has Less Than £25K Net Assets

I often get asked to quote for a Members Voluntary Liquidation, when the net asset position is less than £25,000.  I find that with these amounts, the costs of the MVL procedure will outweigh any tax benefits.

In this article I attempt to explain what people should do if they find themselves in this position.

In the old days, there was an Extra Statutory Concession, that was available for when the asset position was below £25,000.  Extra Statutory Concession C16 (ESC C16) was available until 1 March 2012 with the purpose of allowing shareholders of solvent companies which were surplus to requirements, to get funds out using striking off method, whilst still obtaining the tax benefits which legally were only available under a members voluntary liquidation (MVL).   Through this concession, HMRC would allow you to have capital gains tax treatment under a striking off, providing you met certain criteria and had obtained clearance from HM Revenue and Customs.

From 1 March 2012 this is no longer the case.

If upon strike off, the company funds are below £25,000, the shareholder will automatically be taxed on this as a capital gain (no application to HM Revenue & Customs (HMRC) for advance clearance is required). However, if the funds are above £25,000, the whole amount will be taxed as dividends. This will be at the dividend rates in accordance with your income amounts.

Example – under £25,000 of net assets

ABC Limited has paid all its liabilities and is left with £22,000 in the bank.  It has one shareholder (who is also the director – we will call him Alan).

In this case the monies available to Alan are £22,000.

This will be distributed to him and he will apply for the company to be struck off.  On Alan’s tax return, he will include £22,000 as a capital gain which is currently taxed at 20%.  After using the personal capital gain allowance of £12,000 which is taxed at nil%, Alan would be paying tax on £10,000 at 20% which would total £2,000 tax

What to do

What I suggest you do, is make sure you do all your HMRC returns to the date you cease to trade

  • VAT returns to cessation of trade
  • Deregister for VAT
  • PAYE – all returns complete to cessation of trade, including P11D’s. 
  • Advise HMRC that the company has ceased trading and PAYE ceased.
  • Corporation Tax all returns to cessation have been submitted.
  • Ensure all creditors are paid
  • Get in any monies due to the company
  • Make employees redundant and ensure they receive all the monies they are entitled to

If the amount is under £25,000 when you have done all of this, then pay the monies into your bank and apply for the company to be struck off. 

To strike off the company, it is just a case of following the advice on the website.

What if the amount is over £25,000– say £30,000?

If a MVL procedure is not used, this would be classed as dividend income.

The amount of tax Alan would have to pay is dependent on his income, which would determine the rate the dividend is based on.  If it is the 37.5% rate, the tax would be 37.5% of £30,000 (the whole amount) = £11,250. 

By using a MVL procedure, the costs would be approximately £2,000, and the tax rate (providing the shareholder qualifies for Business Asset Disposal Relief (previously known as entrepreneur relief) the tax that Alan would pay would be:

30,000 less the costs of the liquidation = £28,000, less Alan’s capital gain allowance of £12,000 = 16,000 taxed at 10% = £1,600.

So the tax and costs combined would be £3,600, and a saving of £7,650.

If you are considering closing your solvent company and wish to discuss how to do this (whether to use a MVL procedure or not), would be happy to look at this for you.  We will only carry out an MVL if you will benefit from this.

Call us on 01302 965482 or request a callback using the form on this page and we’ll get back to you.