Can I start a new company after an MVL?

It is possible to legally start a new company after you’ve previously closed one through a Members’ Voluntary Liquidation (MVL), however, there is an important tax rule to understand before you go ahead and do this.

Starting a similar business too soon after going through the MVL process can have huge implications for how the money you took out of your old company is taxed.

In 2016, HMRC introduced the “Targeted Anti-Avoidance Rule”, often known as TAAR, in order to stop a practice called phoenixing.

Phoenixing is the act of closing a company via liquidation to take the profits out as capital (which is then taxed at Capital Gains Tax rates rather than income or dividend rates), then carrying on the same business through a new company and repeating the trick to keep paying less tax.

If the TAAR is applied, then the money you took out of your liquidated company will be taxed as income rather than capital, which means a much bigger bill (income and dividend rates run as high as 39.35%). You’d also lose any Business Asset Disposal Relief you’d claimed if you fall foul of TAAR.

It is important to know that the Targeted Anti-Avoidance Rules only come into effect if all four of these conditions are met:

• You held at least 5% of the company immediately before it was wound up
• The company was a ‘close company’, that is one controlled by five or fewer shareholders at some point in the two years before the winding up
• Within two years of receiving your distribution, you carry on (or become involved in) the same or a similar trade or activity. That includes operating as a sole trader, through a partnership, or through another company
• It is a reasonable assumption that a main purpose of the liquidation was to avoid income tax

The key word here is all. If even one of these four conditions isn’t met, the TAAR doesn’t apply, and your capital treatment stands.

For most people, it’s the last two conditions that really matter, these being the two-year window, and the reason you closed the company. Let’s take a closer look at how these manifest themselves in the case of an MVL.

• The two-year window after an MVL. If you place your company into an MVL and then carry on, or re-start, doing the same kind of work again within two years, you’re in TAAR territory. Once more than two years have passed, the rule can’t apply.
• The reason for the MVL. The TAAR is aimed at people liquidating purely to save tax. If you’ve closed your company for a genuine commercial reason, such as retirement, switching to permanent employment, or starting something genuinely different in a different industry, then avoiding tax wasn’t your motivation, and the rule shouldn’t catch you. HMRC has been clear that it isn’t trying to penalise genuine business decisions.

This means that starting a brand-new company in a different line of work is generally fine. It’s specifically going back to the same or a similar trade with the same clients in the same industry within two years in order to save tax, that causes the problem.

This is exactly the sort of thing worth talking through with your accountant especially if there’s any chance you’ll want to do similar work again in the near future.

If an MVL is the right route, you can get a fixed-fee quote from us in a couple of minutes.