MVL or strike-off: Which is the right way to close your company?

If you’ve got a solvent company you want to close with cash still in the bank, there are two main routes. You can apply to strike off the company at Companies House, or have the company placed into a Members’ Voluntary Liquidation (MVL), which is handled by a licensed insolvency practitioner.

The option which is right for you and your company usually comes down to one question: How much money is in the company?

For most people the dividing line sits at around £25,000. Here’s how to work out which solvent closure route is right for you.

• Strike off (dissolution) is the cheapest option, involving a nominal filing fee to Companies House. This is submitted along with a completed DS01 form and, if there are no objections, the company is dissolved and removed from the register held at Companies House. It’s quick and simple, but the tax treatment of any money you take out depends on how much there is (see below).
• Members’ Voluntary Liquidation (MVL) is a formal liquidation process that can only be handled by a licensed insolvency practitioner. Due to the professional fees involved, this is a more costly option, however, the tax treatment on distributions can often make this the more cost-effective option.

The tax treatment of distributions is often the key deciding factor for directors weighing up their options between strike off and an MVL.

When you strike a company off via a DS01 form, any money distributed to you is treated as an income dividend unless the total is £25,000 or less, in which case it can be treated as capital.

That £25,000 figure is a hard line, and it catches a lot of people out. If you distribute even slightly more than £25,000 on a strike off, the whole amount is taxed as a dividend, not just the part above £25,000.

In an MVL, however, everything the liquidator distributes to you and your fellow shareholders is treated as capital and is taxed accordingly. Due to the rate of capital gains tax levied, an MVL starts to become financially beneficial once you’re over that £25,000 mark.

As a general rule:

• If you have £25,000 or less to extract, then a strike off is usually the most cost-effective option
• If you have more than £25,000 to distribute then an MVL will typically leave you financially better off, even taking into account the professional fees involved

When using an MVL, you may be able to reduce your rate of capital gains tax if you qualify for Business Asset Disposal Relief (BADR).

BADR is a government tax relief scheme that reduces the rate of capital gains tax levied down to just 18% on capital gains up to a £1 million lifetime limit. There are a few conditions you must meet to qualify for BADR on a solvent MVL:

• you hold at least 5% of the company’s ordinary shares and voting rights
• you’re a director or employee of the company
• the company is (or was) a trading company, rather than an investment company
• you’ve met these conditions for at least two years.

So how does the strike off v MVL question work in practice? As an example, let’s say you have £50,000 to take out of your company, you’re a higher-rate taxpayer, and you qualify for Business Asset Disposal Relief.

Using these rough figures, an MVL leaves you with around £9,200 more in your pocket when compared to a simple strike off. Even after deducting the cost of the MVL, you’d still be around £7,500 better off.

This is an illustration to show the principle. It assumes you’re a higher-rate taxpayer and that the whole distribution is taxed at the higher rate. Your own figures will depend on your other income and individual circumstances.

If you dissolve a company via a DS01 form, and that company still has money in the bank, that cash doesn’t come to you. Instead it becomes bona vacantia, and passes to the Crown. Getting this back is difficult and expensive as it involves restoring the company to the register. A liquidation ensures everything is properly distributed to you and your fellow shareholders before it is dissolved.