When is a group structure relevant?
It is not unusual for a new business to start as a sole trade. Quite often a spouse is brought in at some point if there are tax reliefs in doing so and the business becomes a partnership. As profits grow incorporation can be the next step. When does forming a group of companies become relevant?
There are a multitude of reasons why Fred Bloggs might decide to set up his own business. Given the events of the last 12 months we expect that many will have reflected on their lives and decide to ‘go for it’. Whether any business succeeds or fails can be a matter of luck but more often it is down to the skills and adaptability of the owner. Taking advice to fill the gaps in their knowledge is essential. As is the ability to change tack quickly if the ‘good idea’ doesn’t bear fruit. Successful entrepreneurs are always looking for opportunities and the resulting business may not look anything like the initial concept.
It is this very entrepreneurship which means that business owners often have lots of ideas even when they have achieved success. Fred Bloggs will now be looking for opportunities to expand further or branch out into associated trades. Or even contemplating a completely different activity altogether
Consider setting up a group
Rather than having completely different trades all being undertaken within one company, it would be advisable to set up a new entity to run the alternative business. In order to have working capital Fred Bloggs may want to extract some profit from Company A to use to finance Company B. If he takes the funds from Company A as dividends he will suffer personal tax of up to 37.5% even though he won’t be taking the money out for his personal benefit.
Instead, Fred could set up a group structure with a holding company which owns the shares in Company A and sets up Company B to run with his new idea. The holding company can receive dividends from Company A with no tax payable, and loan funds to Company B. Fred doesn’t suffer any personal tax.
We have also set up other group structures for different reasons – for example to buy residential property in separate SPV’s. The tax changes associated with owning a buy to let in your own name has led many to consider putting such properties into a limited company. There are capital gains tax and inheritance tax implications that need to be considered, but for some this could be a way of building up a property portfolio without having to first extract profits from the trading company to finance the purchase.
Or perhaps in our example with Fred, Company A owns the commercial property from which it trades. Fred may prefer the property is extracted into a different business so that he can share the profits from the trade with his employees, but retain full ownership of the property by removing it to a different group company.
Group structures can be useful for many other reasons, including employee engagement through different employee share schemes and retirement planning.
Often it is appropriate to consider recharges of eg rent or admin services from one group company to another. These need to be kept to a minimum to avoid any tax savings being wasted by extra internal costs. Recharges should also be justifiable, perhaps with reference to a formula. Setting up a Vat group could be useful to avoid Vat being levied on every recharge between connected companies.
Corporation tax implications
From 2023 we will once again have different rates of corporation tax depending on the level of taxable profits. To avoid businesses being split into several parts so they all pay tax at the lower rate the relevant limits will be adjusted according to the associated company rules – see the government website.
However, if one of the companies in a group makes a loss, that loss can be surrendered to another group company, saving tax in the profitable company.
Although there can be tax reliefs to setting up different activities within a group structure it won’t work for everyone. There can be capital tax implications and, when looking at property, higher rates of stamp duty and the rather nasty potential Annual Tax on Enveloped Dwellings (ATED). When setting up the holding company, usually via a share for share exchange mechanism, we seek clearance from HMRC to ensure they cannot later argue that tax avoidance was the primary objective – it is imperative that the changes are made for commercial reasons.