Group Reorganisation & Corporate Simplifications – What are they and when are they appropriate?
A group reorganisation usually involves the transfer of assets, which may be shares in another group company or the business of another group company, from one group company to another.
Why do we carry these out?
There are a number of reasons why we would wish to implement a reorganisation. Common reasons include:
To simplify the corporate structure of the group
A period of acquisition or the use of special purpose vehicles may result in a group structure which is too complex for ongoing requirements. Alternatively, it may be that various activities of a group’s business are carried out by different companies and the intention is to simplify the structure such that all activities are brought in to one entity.
A complex group structure can add significant costs to the business and occupy a significant amount of management time. It may also impact on how the group is viewed by HMRC.
Simplifying the structure will mean there are fewer companies to manage and with less entities this may lead to a lower risk rating with HMRC.
A reorganisation may be appropriate where the company or group wishes to sell part of its business. For example, if a business carries on a number of separate trades, then the trade to be sold can be “packaged” into a stand alone company which is then sold to the buyer.
Pre or Post Acquisition
The group may wish to restructure in advance of an acquisition so that the new acquisition can easily fit into the group structure. Alternatively, following an acquisition it may be necessary to move the newly acquired assets around its group structure to ensure they are in the most appropriate place.
The above are only some of the reasons why reorganisations are carried out. Other reasons may include where:
- One part of the business is earmarked for sale or a distressed part of the business is to be liquidated;
- the business may be owned by family members or other stakeholders may want to operate different parts of the business independently;
- It forms part of their succession or inheritance planning;
- We are seeking to ensure that the Company or shareholder qualifies (or continues to qualify) for certain tax reliefs; or
- We are seeking to ‘ring fence’ or protect certain assets
Is tax something we need to watch out for?
Absolutely! We need to carefully plan any reorganisation or restructure and ensure that none of the steps trigger a tax liability at shareholder level or corporate level. In addition we also need to consider stamp duty, stamp duty land tax and VAT.
It is also crucial that we consider whether the reorganisation will cause the loss of any potential tax reliefs.
What are the common types of reorganisation?
Purchase of own shares
Companies can repurchase or ‘buy back’ their own shares. Where there is no other market for shares this may be the only way that shareholders can get the capital, they originally invested in the company back.
Depending on the circumstances, the share disposal by the individual can be treated as either income or capital for tax purposes.
Transfer of a trade
There are tax rules which apply to the transfer of a trade (‘succession to trade’) between companies under common ownership.
Where one company owns at least 75% of another, or both companies are under the 75% common ownership, plant and machinery are automatically be transferred to the successor company at tax written down value which effectively means this is done on a tax neutral basis.
In addition, trading losses are transferred to the successor company along with the trade.
Where specified conditions are met, ‘paper for paper’ treatment is extended to situations where shareholders received shares in a new company which takes over the former company’s trade. This essentially means the shareholder is not deemed to make a disposal for tax purposes and there should be no tax charge at the point of exchange.
Reduction of share capital
Companies Act 2006 contains provisions in relation to the reduction of share capital by private companies. The procedure has been simplified mainly by the removal of the necessity to apply to the courts and so has become more popular.
Generally, there should be no distribution for tax purposes for the shareholder and therefore no income tax (provided the amount received by them does not exceed the nominal value of the shares plus any share premium). As no shares are transferred, there is no stamp duty.
A demerger is the term used to describe the separation of activities which were initially held under common or related ownership.
Groups may want to split out their activities for many different reasons.
There may be conflicting interests between shareholders, legal reasons to separate a trade out from the rest of the group with corporate protection, or it may be the only way for a purchaser to be able to buy certain parts of the business.
There are various types of demerger:
- Statutory Demerger
- Liquidation Demerger
- Capital Reduction Demerger
Please note some reorganisations involve a combination of several of these techniques.
Please note this is only a general summary and is does not constitute advice.
It is critical that you seek professional advice which is tailored to your specific circumstances.
We at ETC would be delighted to discuss any questions or concerns you may have.