What is an ‘MVL’ and how can it benefit Recruitment Agencies and their clients’ whilst meeting the IR35 challenge?
Contractors Closing their Ltd Companies
Most of you I’m sure will be well versed in the impact of IR35 on your client workforce and the role of a recruitment agency in ensuring ‘reasonable care’ is taken when placing clients into new employment.
Some Agencies are placing their clients into an ‘umbrella-style’ solution; others are switching directly to PAYE in cases where the employer is in favour of bringing their contracting workforce in-house. But regardless of whether your client is inside IR35 or what their employment conditions are moving forward, one thing that we can expect to see in the coming months are an increasing number of contractors closing down their limited companies (PSCs).
There are various reasons for this, the obvious one being they now fall inside IR35 and therefore simply no longer have a requirement. But there could be other reasons too: they could be retiring, for example, or the impact of COVID might have been such that they prefer to realise some of their hard-won earnings now while they consider their future. Employment opportunities are not what they were, and some freelancers, understandably, may want to pause and take stock.
Why is this relevant to me, the recruiter?
Having spoken to various agencies recently, it has surprised me how many are unaware of the routes available to their contractors in closing down and unwinding a limited company.
With many agencies having strategic relationships with various groups of accountants, it could be simply that they don’t see it as their role, and something better left in the hands of their advisors/accountants.
In the same way that they refer clients to their preferred accountant at the start of the relationship, and when setting up a limited company, Agencies could also be referring those same clients to a professional Insolvency Practitioner (IP) at the end when the company needs to be closed down.
Not only would they be adding value to their clients in delivering professional services, but they could actually be helping them save thousands in tax. By partnering directly with an IP, your clients can be supported as one ‘tranche’ regardless of the post-IR35 route they have chosen – whether moving to PAYE, shielding under an umbrella, or looking to close the business themselves.
What are the options for my clients who want to close their Limited Companies?
It may be tempting to see anything related to the word ‘insolvency’ or ‘liquidations’ as being negative, but that is principally because insolvency is only ever reported in negative terms, for example around the closure of a major High Street chain. ‘Insolvency’ is in fact a regime comprising many different and distinct services, including a Members Voluntary Liquidation (MVL).
What an MVL does, is enable the business owner (in the right circumstances) to close their company down in the most tax-efficient manner possible. In doing so, it signals how successful their business has been managed.
MVLs are an option for any business that has built up more than £25k (once all liabilities are settled) and is looking to maximise those earnings.
I should take this opportunity to say it’s not simply the company’s financial position that determines the way it can liquidate, but I will come on to those other factors shortly, for now, let’s look at the potential savings between an MVL and the other option – a strike off.
Mr Jones has a successful Ltd company and has been contracting for the last two years. He now has a role inside IR35, however, and no longer needs a limited business. He is the sole shareholder/owner and has £50,000 in the bank and is VAT registered.
There are two main options open to him:
Option 1 would be to strike the company off. In doing so, the owner’s £50,000 would be taxed at 32.5% (taxed on the shareholder as dividends), costing him £16,250. Companies House charge an additional (albeit nominal) administration charge of £10 leaving funds in the bank of £33,740.
Option 2 would be a Member’s Voluntary Liquidation (“MVL”) This route the shareholder would benefit from the Business Asset Disposal Relief, taxed at only 10%, once the IPs fees have been deducted.
The typical fee based on the asset position of £50k will be a typical IP fee (circa £2,000) plus disbursements and VAT. The disbursements will be a statutory bond at £93, statutory advertising at £298.35 and sundry expenses at £15.25, totalling £2,406.60 plus VAT (£481.60). If the company is VAT registered, the VAT can be reclaimed back by the IP and distributed to the shareholder, so in this instance we will assume this has been actioned and add it to total saving.
Therefore, the total cost by using the MVL would be £7,165.94 (£4,759.34 + £2406.60). This option will result in the shareholder receiving a total of £42,834.06 after liabilities and taxes paid, leaving him £9,094.06 better off than a company strike off.
As you can imagine the higher the balance, the higher the saving.
Looking at the example above, you will have probably noted the key difference in the contributing factors that make up the saving using an MVL is the 10% tax rate utilising Business Asset Disposal Relief (formerly named Entrepreneurs Tax Relief).
So which of your contractors qualify for an MVL?
The general rule of thumb in working out if a business qualifies for an MVL is as follows:
- The company is solvent and is no longer required
- Has assets of £25k or more (once all debts are paid)
- Has been trading for minimum 24 months
- Applicant has 5% minimum shareholding
Hopefully the above will have filled in some of the blanks in understanding how your clients handle their financial affairs in the most tax efficient way. MVLs can enable them to close their company down with the minimum of hassle and keeping hold of more of their hard-earned cash.
Hopefully it has also opened your eyes to a potential new strategic partnership opportunity that can benefit your own internal procedures, your clients, and the relationship they have with you.
Who are we?
We are the SFP Group, a licensed Insolvency Practitioner who specialise in contractor MVLs. Last year more contractors trusted us to close down their companies via an MVL than any other IP in the UK.
We work with hundreds of Contractors a year and would be open to discussing any potential strategic relationship opportunities with Recruitment Agencies, or simply offering guidance where necessary.
Feel free to give me a call on 07867 773 085