How to close your company and extract the profits
Paying only 10% tax
Having cash reserves of over £35,000 and you’re planning to close your contractor limited company, it’s obvious you could extract the profits although paying tax at a marginal rate of only 10%.
You’re allowed by a Members’ Voluntary Liquidation (MVL) for extracting the reserved funds of your business in cash, which means you get your money within a few weeks.
Now you can save thousands of pounds using MVL services.
Why are contractors closing their limited companies?
Contractors broadly utilize an MVL for closing down their companies for one of the following reasons:
- They are entangled inside IR35 and no longer want to use a company vehicle.
- They are acquiring a permanent role as an employee.
- They have taken the decision to retire.
With many public sector clients striving to involve contractors via umbrella companies with respect to the IR35 reforms, you may no longer require your limited company.
If you are involved in the public sector and seeking to extract money from your limited company before HMRC calls, an MVL could be the most instant and effective solution.
How does a Members Voluntary Liquidation work?
Normally, when you close down a limited company, the remaining profit will be drawn by the contractor as a dividend, also paying income tax on the dividend amount.
If a licenced insolvency practitioner dissolves your limited company which means your reserves can be apportioned as capital that means they are based on capital gains tax (CGT) at either 18% or 28%.
But one of the prime benefits of using an MVL is that it employs Entrepreneurs’ Relief. Providing you get entitled to, means you pay CGT at a 10% rate on qualifying assets.
Similarly, every shareholder could gain from a tax-free allowance of £11,100 which is also called the Annual Exempt Amount. This can be highly efficient when there are multiple shareholders.
Do you qualify for a Members Voluntary Liquidation?
You wish to make use of an MVL, provided you meet the criteria below:
- After payment of all final liabilities, company reserves are over £35,000.
- The company has been trading for at least 12 months.
- You are an employee of the company and also at least a 5% shareholder.
- You aren’t wishing to trade via a limited company for at least two years following the MVL.
MVLs and the Targeted Anti-Avoidance Rule (TAAR)
Be alert though, MVLs are used only if you absolutely don’t wish to be trading via a limited company for an elongated period of time. They are not to be used as a measure for tax avoidance.
Introduced in April 2016, the Targeted Anti-Avoidance Rule (TAAR) restrict the contractors to wind up companies for allocating profits before establishing new companies instantly afterward—also called as ‘phoenixing’.
If you’re found to be engaged in the same trade within two years of an MVL, TAAR may catch you and undermine the tax treatment you gained from.
Is an MVL right for you?
MVLs can pose immense financial gains and can be very beneficial. There are many things to consider which consists your profit, your personal situations, and the liquidator’s fee.
It’s mandatory for company reserves to exceed £25,000 after all liabilities have been paid, but experts consider £35,000 to be the rough benchmark where an MVL starts proving to be cost-effective.
Ensure that you obtain professional advice to find out whether an MVL is the best alternative for you.
Find out how much you could save with an MVL
MVL could offer consequential savings and provide welcome relief for contractors switching to an umbrella company as public sector changes over the IR35 reforms.
Whatever the reason for you to wind up, we have the essential expertise for helping you close your company as cost-effectively and quickly as possible. Our selected partner is a specialist in the contract sector and can ensure you have access to the retained funds in as little as few weeks.