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Home » Tax Treatment of Members Voluntary Liquidations Set to Change

Tax Treatment of Members Voluntary Liquidations Set to Change

MVL tax calculator

You may already be aware that the taxation treatment of dividends from limited companies will change on 6th April 2016, such that previously tax free levels of dividends will now be taxed. This change will have a negative impact on many shareholders, particularly those involved in contracting or providing personal services via a limited company structure.

Many of these companies were paying salaries and dividends within tax free limits and accumulating cash within the company. At the end of the useful life of the company, it was the usual practice to place the company into Members Voluntary Liquidation (“MVL”) and distribute the cash to the shareholders as a capital gain. In some cases, shareholders were eligible to claim Entrepreneurial Relief (“ER”) and have the capital gain taxed at 10%.

The directors and shareholders of limited companies have been seeking advice since the announcement of these changes in the Autumn Statement by the Chancellor of the Exchequer in 2015, specifically with a view to reviewing limited company structures and planning for the changes to take effect on 6 April 2016.

As an added complication, HM Revenue & Customs (“HMRC”) published a policy paper and draft legislation in the week prior to Christmas 2015, relating to MVLs and the accessibility of ER to shareholders which may have some serious ramifications for your clients and any tax advice you provide in future.

A copy of the documents can be found at this link… Corporation Tax, Income Tax and Capital Gains Tax: Company Distributions

It is clear that HMRC are seeking to introduce legislation to prevent serial users of the MVL procedure (and by implication using ER to limit the tax on capital distributions to 10%) with a Targeted Anti-Avoidance Rule (“TAAR”). Accordingly, should the recipient of the MVL capital distribution fall foul of the terms and conditions, the capital distributions could be retrospectively deemed to be income and thus subject to the normal income tax regime.

The TAAR identified that capital distributions from an MVL will be treated as income under the following circumstances:

  1. An individual, who is a shareholder in a close company, receives from that company a distribution in respect of shares from a winding-up; and
  2. within a period of two years after the winding-up, the shareholder continues to be involved in a similar trade or activity (directly or via an associate); and
  3. the arrangements have a main purpose, or one of the main purposes, of obtaining a tax advantage.

Our preliminary advice on this matter therefore is that anyone considering using an MVL in the near future should do so before 6th April 2016 (any dividend must be distributed prior to this date) to avoid any potential issues as and when the draft legislation comes into force.

Please do not hesitate to contact us should you have any questions or require advice on this legislation.


You can email me at or give me a call on 01603 284284.

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