Group Formation: Corporate Reconstructions
Corporate Reconstructions
A corporate reconstruction can take many forms, however it is most commonly used to either form or reorganise a group of companies. This article will focus on forming a group, please see our other article for more information on reorganisation of existing groups.
Holding Company Benefits
Forming a group involves inserting a holding company above a trading company, or a subsidiary below the trading company. In the case of the holding company, it is possible for the shareholders of the trading company to carry out a share for share exchange to move their shareholdings to the new holding company, thereby transferring their holdings to the total group, rather than just the trading company.
This transaction requires advanced clearance from HMRC and this process should be undertaken by a tax professional to ensure that the requirements are adequately met before the application is made.
A business may wish to add a holding company for a few key reasons:
Asset protection – the holding company could hold an asset such as a commercial property, separating it from the trading company.
Trading status – if the business has or wishes to have non-trading activity such as investments, carrying out those investments in a holding company allows the trading company to protect its trading status, this is key for BADR.
Legal protection – the holding company adds a layer of protection of the shareholders in the event of adverse proceedings in the trading subsidiary.
Flexibility – a holding company would allow the creation of multiple subsidiaries to hive off different trades or parts of a trade.
Substantial Shareholding Exemption – where a company in the UK holds shares in another company and meets the criteria, any gain on the sale of the qualifying subsidiary may be exempt from Corporation Tax.
Group Structure Benefits
A group for tax purposes is generally defined as a parent company, together with its 51% owned subsidiaries. There can be subgroups where a subsidiary has subsidiaries of its own.
There are tax benefits to maintaining 75% ownership, this is a requirement to be in a capital gains group, allowing no gain no loss transfers of assets between group companies.
Advantages
There are many advantages to adopting a group company structure. These include:
Centralised management and administration, with all or most decision-making resting with the parent company. It can create greater financial and operational efficiency.
Reduced risk. Risk is shared amongst companies in the group structure rather than resting in just one business.
Reduced liability. Parent companies are generally not liable for the debt of its subsidiaries, meaning that if a subsidiary collapses, the parent company and its shareholders will be unaffected.
Disadvantages
Advantages do need to be weighed against the disadvantages of a group structure. Business owners should consider:
Raising funds. External investors may be reluctant to invest in a subsidiary company with complex ownership structures.
Complicated finances. Group structures can quickly complicate finances which can become opaque. There will be increased accountancy costs.
Where assets have been moved between group companies as a no gain no loss transfer, there could be a degrouping charge if the asset or new owning company exits the group.
Administration. Where the group exceeds the medium company thresholds, consolidated accounts may be required which can add complexity and costs to the annual compliance cycle.
Tax Advantages
Whilst each business within a group structure will be required to pay corporation tax, VAT and other relevant taxes, a group structure can offer attractive tax advantages and efficiencies. These include:
The ability to transfer assets between companies in a group structure without triggering a disposal charged against Corporation Tax on any gains.
Groups can account for Corporation Tax through one company in the group through the ‘group payment arrangement’.
Companies in a group can account for VAT at a group level, with supplies between group companies exempt and with just one entity paying VAT on behalf of the group.
Losses of group companies can be surrendered to profit-making group companies, potentially reducing Corporation Tax as a group.
Summary
Overall, creating a group structure is an excellent method of improving a business structure to allow for greater flexibility, reduce ongoing compliance costs and enhance tax efficiency.
At Levy Gera, we are experts in advising on the set up of a group and would be delighted to assist you.
If you are unsure if a group structure would be useful for your business, please feel free to reach out to book a discovery call with our tax specialist Ben Hawkins on info@levygera.com.
This article was written by Ben Hawkins, our tax lead and a Chartered Accountant and Chartered Tax Adviser with more than 10 years of experience in UK corporate tax. One of his areas of expertise is Corporate Reconstruction.
