Liquidating limited company

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Contractors retiring or taking a permanent role and who have cash in excess of £50,000 left in their contractor limited company can use a members’ voluntary liquidation (MVL) to distribute the funds tax efficiently.“Following the creation of Section 1030A, which replaced ESC C16 in April 2012, contractors with cash in excess of £25,000 left in their company were forced to distribute funds as income and not capital, thus incurring income tax liabilities at a marginal rate as high as 37.5%,” explains James Abbott, owner and head of tax at contractor accountant Abbott Moore.Historically contractors looking to close their company would make a request to HMRC under ESC C16 to treat any final distribution as capital rather than income.However since 1st March 2012, ESC C16 was written into tax law with a distribution limit of £25,000.Whilst winding down a limited company is far from the minds of contractors who are just starting out, with luck every contractor will reach the point of retirement or may even at some point re-enter the world of the permanent employment.There have been various mechanisms over the years that have allowed contractors to close their companies as tax-efficiently as possible.As Rosler explains, contractors should consider the cost of a members’ voluntary liquidation before pursing one: “The costs of liquidations have reduced significantly, and contractors can find licensed insolvency practitioners who will perform the liquidation at competitive fees.However, there is a threshold below which the liquidation option is not cost effective for the contractor.” Abbott agrees, and provides an example: “For a contractor about to retire and who has a £35,000 cash balance in their company, a logical option might be for them to go to a liquidator and get the tax benefits of a capital distribution, rather than pay 25% tax on an income distribution.

“From that point on, the contractor usually does nothing until the cash arrives in their bank account.” The liquidator will post notices in the London Gazette that the contractor’s limited company is undergoing a members’ voluntary liquidation, and inform Companies House that the company is being liquidated.However, according to Andrew Rosler, a licensed insolvency practitioner and managing director of Ideal Corporate Solutions, contractors can choose to close their company using a members’ voluntary liquidation.“Liquidating a contractor’s company by a licensed insolvency practitioner enables high cash reserves to be distributed as capital, potentially attracting a tax rate as low as 10%,” explains Rosler.“The declaration of insolvency demonstrates that the company will be able to settle or secure liabilities and the costs of liquidation within 12 months,” continues Rosler.“After the declaration, the company convenes a meeting of shareholders to put it into liquidation and appoint a licensed insolvency practitioner as the liquidator.” In practice, it is likely that it is the contractor, or the contractor and their spouse, who are the directors and shareholders, so the shareholders’ meeting and resolution is a formality, but one that must be minuted.

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