Contractor liquidation: closing your company with an MVL

If you’ve been contracting through your own limited company and you’re ready to move on, whether that is due to retiring, pivoting into a permanent role, or simply wanting to wind things down, you’ll likely have a chunk of money built up in the company that you want to take out as tax-efficiently as possible. For most contractors in that position, a Members’ Voluntary Liquidation (MVL) is the best way to do it.

Contractors, freelancers, and consultants who work through a limited company tend to leave profits building up inside the business as retained cash. When you stop contracting and want to get that money out of the company, how you choose to do this makes a real difference to your tax bill.

One of your options is to take it all out as a final dividend. If you do this, the money will be taxed as income and therefore be subject to dividend rates of up to 39.35%.

Your other option is to close the company through a formal MVL process. When extracted through an MVL, the distributed money is treated as capital gains rather than income and is taxed accordingly. For many contractors, they may also be eligible for Business Asset Disposal Relief which reduces the rate of CGT down to a flat 18% on qualifying gains.

• Retirement – Stopping trading for good and taking the money tied up in the business out as efficiently as possible
• Going permanent – Moving into an employed role and no longer needing the company
• The IR35 changes – The reforms to off-payroll working (IR35) have led many contractors to stop working through a limited company, leaving them with a company to close and proceeds to extract
• A change of direction – Pivoting into a new industry or way of operating that does not require the existing limited company

While an MVL is often the best closure method for contractor companies, it is not necessarily the most appropriate option for every situation.

An MVL typically makes sense once there’s more than around £25,000 of cash to take out of the company. For amounts below that, a simple strike-off via a DS01 form will allow this money to be taken out and treated as capital rather than income without the expense of a liquidation.

Above £25,000, however, the MVL route generally leaves you better off, even after taking into account the costs associated with placing the company into an MVL.

While you are not necessarily prevented from contracting again following an MVL, there are strict tax avoidance rules that you will need to ensure you comply with.

The Targeted Anti-Avoidance Rule (TAAR) is in place to prevent the practice of phoenixism that sees a director closing a company to achieve a tax benefit, only to resume trading straight away.

If you close your company through an MVL and then go back to contracting in the same line of work within two years, this can trigger TAAR which would see the distributions reclassified as income.

If there’s a chance you’ll pick up contracting again in the near future, we recommend you discuss your plans with your accountant and insolvency practitioner before going ahead with the MVL.

If you’re a contractor with a simple company, our fee is a fixed £995+VAT, with the all-in cost (including the statutory disbursements) typically landing between £1,600 and £1,900. At MVL Online, we handle the whole process for you from start to finish.

If your company’s affairs are straightforward and an MVL looks like the right route, you can get a fixed-fee quote in a couple of minutes.