MVL Case study of a contractor caught inside the recent IR35 Legislation

John, an IT contractor, had been trading for the past 5 years via his limited company. He was recently notified by his client, however, that due to being caught inside IR35, the end client was no longer able to pass work to him via his limited company. John was able to continue working with the client, however, on the basis that he was paid each week via an umbrella company.

John no longer had any need for his limited company which had reserves of around £100,000.

If John, a higher rate tax payer, had decided to close down the company himself and draw these funds as dividends then his personal tax bill would have been over £30,000.

John, however, decided to close down the company using a Members Voluntary Liquidation (MVL) process.

Because John was paid the company reserves from the Liquidator, he will be able to benefit from Entrepreneurs’ Relief which will result in a lower personal tax rate of 10%. This will bring his personal tax bill to below £10,000.   

Members Voluntary Liquidation (MVL) Case Study

Director was no longer trading his company which had net assets of nearly £300,000

• The Company was an management consultancy business and had traded for around 3 years.
• The Director advised that the company was solvent, able to pay all of its debts, and had traded profitably throughout.
• The company had only two creditors, their accountants and HMRC for Corporation Tax and VAT.
• The assets of the business consisted of approximately £350,000 cash remaining in the company bank account.
• The Director wanted to cease trading the business as he had obtained an employed role elsewhere.
• The Director, who was also the company’s sole shareholder wanted to extract the net funds of £300,000 from the business in the most tax efficient way.
• The director obtained tax advice from his accountant who discussed with him the following options for the company.

Strike off – The option of writing to Companies House to apply for the company to be struck off was discussed. The company would have to pay the outstanding creditors in full and distribute the remaining funds by way of shareholder dividend, following which the company could apply for strike off. However, this would not have been the most tax efficient manner to distribute the funds for the shareholder who was a higher rate tax payer as the rate of income tax payable (32.5%) would have been greater than if the funds were distributed in a Members’ Voluntary Liquidation (10%).

Umbrella explained the MVL option to the director, who after taking further tax advice from his accountant,  felt that this would be the best option for him and the company. This would allow the company to be formally wound up and also ensure that all creditors were paid in full through the liquidation process. The director was advised by his  tax advisors that an MVL would be the most tax efficient way of extracting funds of £300,000 from the company as this would be regarded as a capital distribution from the liquidation rather than being taxed as income. As a result, he as a shareholder would qualify for Entrepreneurs Relief (10%) on the capital distribution of these funds.

Umbrella were duly instructed to administer the MVL process with funds paid out to the shareholder shortly after the liquidation appointment.

Administration Case Study

Company Directors of a Printing Business approached Umbrella to look at the company position following creditor pressure, with debts in excess of £800,000.

After analysing the trading position, it was clear that a CVA wasn’t viable as the company had immediate funding issues and was unable to maintain payments to general trade creditors and key suppliers in addition to the impending threat of enforcement action from the Landlord and HMRC.

Liquidation was not appropriate as this would have resulted in the Company ceasing to trade and thus would have suffered a detrimental impact of its book debt ledger (the Company’s primary asset). This would have likely resulted in considerably reduced realisations for the benefit of creditors.

As the Company had a loyal customer base and there appeared to be an inherent value in the business, Umbrella arranged for independent agents to provide a valuation of the company assets on a going concern basis.

Following advice from Umbrella, the directors agreed that steps ought to be taken to place the Company into Administration as this outcome represented the best outcome for creditors as a whole and would protect the business from enforcement action.

The protection would allow the business to be preserved whilst the possibility of selling the business as a going concern was explored. It was however recognised that a quick sale, without the need for ongoing trading whilst in administration, would be preferable to allow maximum value to be realised from the Company’s debtor ledger and goodwill.

Management expressed an interest in buying the company assets and business as they were confident of making the business a success with smaller premises and a smaller workforce.

The directors were very worried about the recent bad press concerning pre-packaged administrations, however, Umbrella have a wealth of experience in handling such cases and the main route to a successful pre-pack is to get professional advice at an early stage from a Licensed Insolvency Practitioner.

In such cases, Umbrella’s Insolvency Practitioner will meet with the directors personally to ensure it is the best advice and make certain the process is implemented correctly right from the outset.

In this scenario, the company entered Administration and all the assets were sold to management for an agreed price of £40,000. The continuity in trade ensured that the Company’s funder was repaid in full from book debt collections. All other company liabilities including HMRC, the Landlord and trade creditors were dealt with by the Administrator and the former directors succeeded with their new company plans.

Creditors Voluntary Liquidation (CVL) Case Study

Company Directors of a Consultancy Business approached Umbrella to look at the company position following creditor pressure, with debts in excess of £225,000.

John and Paul, directors of a consultancy business approached Umbrella with debts in excess of £225,000 mainly to HM Revenue and Customs. They had built up their company over a period of 9 years but due to issues in retaining their customers, they were unable to maintain payments to suppliers and in particular the Corporation Tax, VAT and PAYE that was due.

The directors were no longer able to support the company from their own funds and there are no funds left to pay the employees who were owed significant sums.  Furthermore, bailiffs were beginning to knock on the door demanding payments.

After an initial consultation with Umbrella, it was clear that the company could not continue to trade in its current form as it was losing money every month that passed.

Restructuring of the company was not a viable option as the business was struggling to keep hold of its paying members and the monthly outgoings could not be squeezed any more.

Therefore, advice was given by Umbrella to cease trading immediately. This reduced the risk of the directors being held personally liable for continuing to trade the business when it was to all intents and purposes insolvent. Umbrella assisted the directors in the unenviable position of having to inform all staff of the redundancies and the doors were closed. Agents were employed to sell the company assets and the directors found alternative employment.

Employees were happy to find out that under the provisions of the Employment Rights Act 1996 they would receive their entitlement for wages, holiday pay, pay in lieu of notice and redundancy up to certain limits. The directors were also able to make a claim. The bailiffs were not able to take any further action and the Liquidator was appointed to deal with all creditor claims and assets of the company.

The directors had given no personal guarantees and as such the debts of the company including HMRC were dealt with by the Liquidator.