Creating a group of companies requires careful thought.

If you are considering whether to transfer the current trading activities of a private company into multiple subsidiaries, you will need to take into account various commercial and tax considerations.  Below we highlight the key advantages and disadvantages. 

   Advantages  Disadvantages and limitations
Commercial considerations        Ring-fencing of liabilities relating to each trade in a separate limited liability company. Provided the limited liability status is correctly managed, the insolvency or other financial distress of one subsidiary will not impact others within the group. The overall advantage of ring-fencing can be lost to the extent that group finances are not separated (e.g. if there are intra-group guarantees, indemnities or security granted). Also this advantage will be lost if there were an insolvency of the holding company, which will most likely affect the whole group.
Ring-fencing ownership of IP and other key assets in the holding company (or another separate non-trading subsidiary) may protect those assets from the risk of trading liabilities in the same way as is described above. This advantage is subject to the same limitations described above.
Future acquisitions could be placed directly within, or underneath, the relevant subsidiary for that business line.  
Each subsidiary could in principle be disposed of separately from the other as a distinct business unit. This could offer genuine benefits to a buyer as it would not need to identify the specific assets it wishes to acquire and can instead buy the subsidiary as a package. In practice this advantage may be negated by the tax consequences (see tax considerations below – principal issues are cash from the sale being “trapped” in the holding company and de-grouping tax charges). It may be necessary to consider a tax efficient demerger for an exit of one business.
It may be easier to identify the performance of each distinct business by accounting for each separate subsidiary. This may also make incentivising key employees easier by reference to the performance of each distinct subsidiary. Initial set-up and ongoing administrative time and costs, and a requirement to prepare group as well as company accounts.
Most share-based incentive arrangements (including EMI options) will need to be at the holding company level in order to benefit from favourable tax treatment, so some of the benefits of using separate incentive arrangements for each subsidiary may be lost.
Brands - each distinct business could operate more easily as a distinct subsidiary alongside separate but complementary brand. Shared assets may be more complicated to administer.   For example, shared occupation of leasehold premises unless group occupation is allowed. The allocation of shared costs and assets will also require careful and transparent “arms-length” planning.  For example, costs of senior management, back office and others who may perform services across the group.
Overseas customers may prefer to deal with a company incorporated in their own jurisdiction which they perhaps more readily understand. Note in the tax considerations below that if assets are transferred to a non-UK resident subsidiary, this may not be done in the same tax-neutral way as with a transfer of assets to a UK subsidiary.
 Tax considerations  

A reorganisation like this could be implemented on a tax neutral basis.
Note that if such a reorganisation were extended so that the assets of a UK company were transferred to a foreign subsidiary for future use in the foreign trade, a tax charge would most likely be triggered as the tax neutral intra-group transfer rules only apply where the assets stay within the scope of UK tax.

There is no particular upside to implementing such a reorganisation from a tax perspective. Any tax benefits are likely to be only marginal.
If a sale of a smaller / less valuable business came first, the group could (if the shareholders were willing to leave the proceeds of that sale in the holding company for a time) potentially proceed with a simple tax free sale of that subsidiary by the holding company, then achieve the later main exit by way of a sale of the holding company.

A sale of one subsidiary would leave cash in the holding company, which would be difficult to extract in a tax-efficient manner save on a later sale of the holding company.
If the sale of a subsidiary were to happen within 6 years of the reorganisation, it would also generate de-grouping tax charges on intangible assets. The subsidiary would, on leaving the group, be deemed to sell and re-purchase any intangible assets at their market value as at the time of the reorganisation.
However this tax would also arise in any event on a sale of one part of the business. The potential advantage of doing a transfer earlier is that tax is calculated by reference to the then current value of the intangibles, not the value at the time of the future sale.
In practice, it may be advisable to undertake a tax efficient demerger before the sale of one trade / subsidiary, whether or not the reorganisation was implemented earlier. Doing the reorganisation earlier will not make a later demerger significantly more complex. The potential for de-grouping charges may need to be managed more carefully, but it should be possible to structure a demerger so as to prevent de-grouping charges whether or not a reorganisation has taken place.

  Possible restriction on the transfer of losses from the holding company to the subsidiaries, but only if the holding company retains liabilities relating to the trade.

If you would like to discuss how we can advise you on matters in this area, Mark Tasker will be happy to help. 


Mark Tasker photo

Mark Tasker

Partner and Head of Corporate & Commercial

T
+44(0)20 7551 7777

E
m.tasker@bwbllp.com
View full information about Mark Tasker

Posted on 11/03/2019 in Legal Updates

Back to Knowledge