Liquidation Changes

Members Voluntary Liquidations

As of April HMRC have changed the rules regarding MVL’s in an attempt to stop ‘Phoenixing’ and ‘Moneyboxing’. The end result is that leaving large cash reserves in a business in the hope of extraction at a low tax rate has suddenly become not such a sure thing.

Prior to April if a person had had enough of the business world and wanted to wind up a company then in the majority of cases all residual funds could be extracted with capital tax treatment and would also be subject to entrepreneurs relief giving an effective tax rate of 10%. This has now been changed in order to trap people who misuse the rules and leave large cash reserves retained within the company which is called money boxing and, also, parties who use MVL as a way of removing funds from the company cheaply before immediately starting up an identical company and repeating the process, called phoenixing.

Money boxing

This applies to a situation where a director who is also a shareholder retains profits within the company over a long period of time in effect using the company as a savings account before deciding to wind up the company. It would seem that the new legislation dictates that any funds removed from the company would be treated as income and taxed as such which, obviously, is disadvantageous in comparison to capital gains tax.

It remains to be seen how HMRC are hoping to enforce this and all guidance on the matter is rather shaky at best. It seems that if it can be proved there is a genuine commercial reason for having large cash deposits within the company, for example any business that requires regular large capital expenditure, then the MVL should not be caught by the new legislation and will be treated as capital and allowable for entrepreneur’s relief as before.


Phoenixing is slightly easier to identify and is associated mainly with property development firms. In essence the idea is that a contract is completed and a large amount of cash is paid into the company. Instead of drawing this as salary or dividend the directors will wind up the company, through an MVL, and remove the residual cash at the substantially lower 10% tax rate. The owners will then create a new company and repeat the process which allows individuals to receive large amounts of income at a low tax rate.

Again the enforcement will be a challenge for HMRC however, after deciphering the guidance available, it would seem that any person or a related person who incorporates a new business within 2 years of a MVL in a similar trade will be subject to income tax rather than capital gains tax. The main problem arises in family owned business. If a father retires and winds a company up, as is expected, the son who may be in the same trade risks imposing a large tax bill on his own father if he were to incorporate a company within 2 years.

Final thoughts

As is always the case with new legislation it will be a waiting game to see how far the HMRC boundaries can be pushed before we get definitive answers to the above questions. It would seem reasonable that anyone embarking upon a MVL for genuine commercial reasons should not be punished. However, as the past will show sometimes legislation misses the mark and affects unintended parties. One thing is clear though, MVL could be about to get a whole lot trickier.