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Time to Expand – Choosing an Appropriate UK Company Structure

Author

Paul McKay

A vastly experienced tax professional with over 35 years’ experience of advising PLCs, not for profits but predominantly SME/OMBs and professional advisers on most aspects of tax. Paul has a broad background including working for big 4, tax boutiques and a large local practice, and joined ETC Tax in October 2017.

Picking The Best Corporate Structure for a Diversified Family or Owner Managed UK Company Expansion

Many mature family companies have over the years developed a number of trades or ventures. Where the second or even third generations are actively involved in the management of a company it is not uncommon for family members to be involved in their “own” part of the business.

It is often the case that it is only when further expansion is contemplated, possibly through organic growth and additional activities or the acquisition of an existing business, that detailed consideration is given to the corporate structure.

In overview the choice of the corporate structure for a diversified family or owner managed company is between;

  • A single – divisional company
  • Parallel companies i.e. a number of companies with a common share ownership
  • A corporate group structures

Although in practice combinations of two or possibly all three are seen, not to mention the inclusion of LLPs and general partnerships.

Each structure has advantages and possible down sides.

Planning for the major shareholders departure is often the key driver as to structure and here planning for the availability of Entrepreneurs Relief (ER) is likely to be the major influence. ER gives a reduced rate of CGT of 10% (otherwise 20%) and is subject to a lifetime cap; this was last increased to £10m in 2011 and whilst this was generous at the time it is not so now.

At a corporate level planning for Substantial Shareholder Exemption (SSE) is likewise a significant driver. SSE enables a group  to sell a trading subsidiary with no immediate tax cost. The provisions were significantly relaxed in 2017 and can now apply to a non trading holding company selling a single trading subsidiary.

The introduction in 2016 of the  corporate anti-avoidance “phoenixing“ rules have largely blocked the once common technique of setting up  a special purpose company for each new project  and liquidating the company and the individual shareholder withdrawing the post corporation tax profits with the benefit of ER.

Single – divisionalised company

In overview a single legal structure (company) with several divisions or branches. Generally speaking, a divisional structure gives administration cost savings, but potential exposes the company as a whole to potential claims arising from a high risk division.

A group can be converted to a divisionalised structure without a tax cost or at least without a material tax cost. The trade and assets could be hived up to holdco or transferred to holdco at their carrying value with the consideration left outstanding. The subsidiary needs sufficient distributable reserves to cover the carrying value. There should be no capital allowance claw back and any losses should follow the trade . A capital gains and IP group should exist enabling transfers to be made in a tax neutral way.

It may be feasible to ring fence valuable trading names and for asset protection leave them in the subsidiary.

Parallel Companies

In overview each trade is run through a separate company, there may be different shareholders (giving flexibility for management shareholders) but typically a core of common shareholders often giving common control.

A major benefit is the availability of ER to the shareholders, however, with the loss of SSE and a possible increase in the overall tax cost should the wish be to sell  a trade and reinvest back into the wider business or retain the funds for a different corporate investment. Losses will not be available to other companies under common control and assets and IP may not be transferred inter company without a potential tax cost, re- charges will have to be at market value.

Group Companies 

It may be possible to bring parallel companies into a group in a largely tax neutral way by means of a share for share exchange. In these circumstances the new shares acquire the history and base cost of the old shares. The exemption form stamp duty (at a rate of 0.5%) requires the new and old shares to be a mirror image and this may not be possible when several companies are brought together (although it is normal practice to transfer the most valuable company first as this will qualify for SD relief).

Where there is a 75% or more group there is generally complete flexibility to transfer losses and assets around the group and the group is seen as a single unified tax entity, although there are limitations to this broad principal.

Conclusion

There is no definitive yes or no answered as to the best structure and to an extent there has to be a balance between the needs and objectives of the shareholder(s) compared to those of the companies / trades. Early planning is called for  and for instance HMRC may resist clearance for a share for share exchange where it is clear that the driving factor behind it is a share sale.

For more information on setting up a new company structure in-line with business expansion contact our helpful team of tax advisers or be sure to read more tax advice relating to companies and expansion below…

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