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A Guide to: Group Structures

In Summary

Heather Tulloch, Senior Manager/Consultant

heather.tulloch@ashcroftllp.com

8 October 2021

The decision about how to structure your business/es will have significant tax consequences both for the businesses and the shareholders.

If you have more than one business line then there are three main options available to you.

Any contracts with customers, suppliers and employees will need to be in the name of the correct company, so you may need multiple contracts with certain parties.

What you need to know

Businesses come in many shapes and sizes – from standalone owner-managed companies to multi-national groups with hundreds of connected companies. The decision about how to structure your business/es will depend on many factors but it will have significant tax consequences both for the businesses and the shareholders so it is important that these are considered as part of the decision.

As the business grows or changes over time, and your plans for the future develop, the optimum structure may also change, whether it be for commercial or tax reasons. Moving businesses between entities can be complex and care is needed to minimise the associated tax – however the potential benefits of having the correct structure in place will generally outweigh any tax that does arise.

Potential structures

If you have more than one business line then there are three main options available to you:

  1. Include all of your businesses in one company;
  2. Put each business line into a separate independent company;
  3. Create a group structure by putting each business line into a separate company below a holding company.

Operational issues

Any contracts with customers, suppliers and employees will need to be in the name of the correct company, so if you opt for a structure with more than one company you may need multiple contracts with certain parties. It is possible to keep central costs within one of the companies and then share out those costs with the other companies by way of a recharge – this adds time and additional paperwork but provided all companies are VAT registered should not have any tax cost.

The thresholds set out in Company law for accounting disclosures and the audit threshold apply on a group wide basis, having one large company or a group structure may result in additional compliance requirements compared to having several independent companies. Additionally, the professional fees involved in running several companies, whether they are independent or in a group structure, will be higher than the costs of running one company.

It should be noted that where there is a group structure in place EMI options can only be issued by the parent company so employees in the subsidiaries will all be granted options over the shares of the parent company, regardless of which company they work for. For more details on the EMI scheme and how it can be used to incentivise key employees please see our EMI guide.


Financial considerations

If there is only one company there will only be one set of statutory accounts and one tax return. However, it may still be necessary to split the profits and losses of each of the businesses and disclose them separately on the tax return – this will depend on the nature of the businesses. This will generally mean that any losses can be offset against profits such that corporation tax is only due on the net profit of the whole enterprise.

If each business is put into a separate company there will be multiple sets of statutory accounts and corporation tax returns. In the second scenario it is not possible to offset profits and losses so the profitable businesses will have to pay corporation tax on their profits and the loss-making businesses will simply carry forward their losses.

Whilst separate tax returns are still required in the third scenario the loss-making companies will be able to surrender their losses to the profitable companies such that the group only pays tax on the net profit.

For more details on the rules relating to corporate losses please see our guide.

There are certain reliefs that must be shared amongst connected companies, and the definition of “connected” varies depending on the relief. For example, the Annual Investment Allowance (AIA, which provides relief for certain types of capital expenditure) must be shared amongst companies in a formal group, but it also must be shared amongst companies under common control who operate from shared premises or have similar activities. Therefore, it is likely that all three of the structures above would only have one AIA to share between the various businesses.

Conversely, the rules setting out when companies must pay their corporation tax consider the number of companies in a group rather than those under common control such that it is possible that the third option would accelerate when corporation tax was due.

If all of your businesses are within one company there is no need to recharge costs between them and therefore no VAT liability arises on intra-business transactions. There would only be one VAT return to prepare and submit.

If the businesses are in separate companies then VAT will need to be charged on intra-company recharges by any VAT registered companies within the structure. Multiple VAT returns would be required.

The same is true if the companies are in a formal group but they would have the option of forming a VAT group such that no VAT needed to be charged on intra-group supplies and only one VAT return needed to be made.

The VAT position is further complicated if any of your businesses are exempt supplies as this could restrict your ability to recover input VAT. However, if the exempt supplies are a small part of your business having the correct structure in place may actually allow you to recover all of the VAT you suffer.

As plans change you may need to transfer assets such as properties between your businesses. Where there is only one company this will not trigger any tax charges.

If you are transferring assets between separate companies, not in a group structure, then a chargeable gain will arise and there will also be a Stamp Duty Land Tax (SDLT) charge on any land or property transferred. As the companies will be connected by virtue of being under common control these taxes will be calculated as if the transfer took place at market value even if no consideration was actually paid.

In a single entity shareholder value is extracted either through remuneration or dividends, subject to available profits. In either of the alternative structures this will remain the case. Directors can receive salary and bonuses in exactly the same way. In the event profits are to be paid out as a dividend then the only change will be where they are declared from. Dividends from the group structure must come from the holding company in which the shareholders hold shares. The trading companies would therefore need to declare and pay up dividends to fund the dividend declared. The advantage of one of the alternative structures is that losses of one business line does not impact the distributable profits generated by the others, although given those profits are likely to have funded the losses cash flow may not actually be able to fund a higher level of dividends that would be the case currently.

If you only have one company it is easy to reinvest any profits arising in one business line in another as the cash is sitting in the company bank account.

Where you own several independent companies this is more difficult. The profitable company can lend the funds to the other company but this creates an intercompany debt which may linger for many years making it difficult to shut down the profitable company if it has run its course. It may also be necessary to charge market rate interest on the loan. Alternatively you can withdraw the funds and then introduce them to the other company, but the withdrawal will incur personal tax thus reducing the amount available.

If there is a group structure in place the profitable companies can pay dividends to the holding company without any tax implications and the holding company can then lend the funds to the other companies in the group.

Options for exit

There are several reasons you may be looking to exit one or more of your businesses – you might receive an offer that is too good to turn down, see another opportunity that you need to free up time (and cash) for or you may be ready to hang up your boots. 

If you are looking to exit entirely then the choice of structure is less important from a tax perspective – you will be selling all of your shares in the entities giving you a capital gain on which Business Asset Disposal relief (BADR, formerly Entrepreneurs Relief) may be claimed, provided the conditions are satisfied. However, the different structures each come with their own commercial considerations for buyers, which will include the tax issues discussed here.

Options for part-disposals

However, if you are only looking to exit from some of the businesses then the structure becomes much more important from a tax and commercial perspective.

If the target business line is in a company with your other businesses you will either need to persuade the buyer to buy the trade and assets of the business or you will need to move it into a separate company which the buyer can then purchase. The tax arising in your company will be significantly different – under the first option the company will be subject to corporation tax on the profits made on the deal, whereas it is likely that the second option would qualify for a relief called Substantial Shareholding Exemption (SSE) such that no corporation tax was due on the sale. However, depending on the assets involved and the mechanics of the deal, some tax charges may arise on the profit made on the transfer to the new company.

If the target business is already in a standalone company then it is likely that you will agree to sell the shares of that company, in which case you will have a capital gain on your shares and BADR may apply such that tax is only due at 10%. If the buyer wants to buy the trade and assets rather than the shares then the company will be subject to corporation tax on the profit and you will then need to extract the funds from the company, unless you want to leave them in the company for use in a new venture in that company. If the funds were extracted promptly by way of winding up the company then this would be a capital gain and BADR should be available.

If the target business is in a subsidiary company in a group structure then it is likely you will agree for the holding company to sell the shares of that company. This will give rise to a capital gain in the company but as above SSE may be available meaning the profit can then be used elsewhere in the group without any tax becoming due. However, if you wish to extract any of the proceeds from the group this will be taxed as income rather than capital and therefore suffer higher rates of tax. If the buyer wants to buy the trade and assets rather than the shares then the company will be subject to corporation tax on the profit, but the net amount can be retained in the group with no further tax cost.

This is a complex issue! You can rely on our expertise to guide you through each step…..

As I’m sure you can see from the various issues discussed above, there is no one-size-fits-all answer to how to best structure a business, and the answer will depend on many factors of which tax is only one. We have worked closely with many clients to help them to set up businesses, restructure businesses and to sell businesses so we are well versed in the various matters that need to be considered at each stage of the life cycle.   

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