The concepts of group structures and holding companies sound very corporate. Like, really, obnoxiously corporate. The idea of having several companies owned by another company which, in turn, is owned by a bunch of shareholders can be daunting. And that’s not even mentioning the extra statutory burdens it seemingly places on the business: more VAT returns, CT returns, multiple monthly payrolls, and multiple sets of accounts to file. If you are a small business owner, you’re probably on the verge of a headache having read that – sorry!

And yet, an ever-growing number of new and existing clients have approached us over the years on the topic of group structure, asking “Should we do this?” or, if they’ve done their research, “Why aren’t we doing this?”. After all, large corporations worldwide utilise group structures all the time, why shouldn’t they do it, too?

This has been especially prevalent in a post-COVID world. Given the chaos and uncertainty the economy has experienced over the past eighteen months, the reduction of commercial risk has been at the forefront of our clients’ minds.

So, for all of those that have already asked, and for those of you yet to ask, let us take a step back to demystify what’s being done and, more importantly, why it’s an increasingly popular practice in the SME world.

The How

So, how do you do it? Well, there are an infinite number of ways in which you could choose to restructure your business – you can, in fact, incorporate as many companies as you like, as long as you pay the incorporation fees – but the purpose of a restructuring effort should never be to ‘muddy the water’, so we will look at the most straightforward, and often the most applicable, layout for small businesses: setting up a holding company.

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So, you incorporate a new company with Companies House and that’s it, right? Well, it’s not quite that simple. For the sake of business continuity, the new holding company needs to acquire the shares in the existing business, and the new company needs to be owned by the same shareholders. This is achieved with a manoeuvre known as a share-for-share exchange.

Right, now that you’ve done the share exchange, everything’s good-to-go? Not quite… Stock Transfer Forms (that headache is returning, I’m sure) need drafting and signing, and you will need to file the correct forms with Companies House to update the existing company’s shareholdings.

Okay, you’ve completed the share exchanges and submitted the statutory filings with Companies House; I’m afraid that’s not all. A share transaction like this would usually give rise to Capital Gains Tax and Stamp Duty for the shareholders selling their shares, based on the value of the existing company. Thankfully, there are reliefs and exemptions that can be applied for if the ‘beneficial owners’ (i.e. the people who ultimately control the company) remain the same.

Now that the exemptions and reliefs have been granted (if you’ve applied for them correctly), what’s left to do? Setting up bank accounts, transferring assets, licencing assets, setting up ongoing intercompany transactions; the list goes on. The point is, restructuring your business is an ongoing process that doesn’t happen overnight; indeed, it may take several months to progress and finalise.

The Why

You might be asking yourself why you would even bother going through all those steps if your business structure isn’t ‘broken’. Well, much like a submarine or a spaceship, if one component of a company goes awry, everything is at risk of breaking, not just the part that’s faulty. Sure, it wouldn’t be as immediate, or as explosive, but the end result is much the same. Perhaps the adage “Don’t put all your eggs in one basket” needs modernising to something like “Don’t put all your assets in one actively trading company”? Anyone? Just me…?

The separation of trade from assets

Given what has been said above, it would be considered a logical approach to separate the existing value within a company from the risks associated with day-to-day trading. Assets, both tangible and intangible, can be transferred to a holding company and then licenced to other companies in the group. Trade then continues as normal – no upsetting your customers or suppliers – with heavily reduced commercial risk.

There is some legwork required if the company has financed assets to move, as lenders must accept the change in borrower. In our experience, however, lenders tend to understand and respect the commercial logic of a restructuring exercise. In fact, doing so actually ringfences the assets under finance away from risk, meaning it is in their best interests, too.

Growth through acquisition

If your business is looking to grow through acquisition, using a group structure makes things easy. Shareholdings of the company being bought are acquired by the holding company, and it becomes part of the group – simple! Any group-owned assets can promptly be licenced to new group companies, allowing them to benefit from being part of the group almost immediately.

Why does that matter, though? Well, for tax purposes, grouped companies can be taxed as a collective. This means that cost centres within the business can be offset against those making profit; the long and short is that the business will likely have less tax to pay.

Attractive to investors

What if the business is looking for external investment? A robust group structure provides investors with the reassurance that the business isn’t exposing itself to unnecessary risk, and allows for investment either in the group, or in a specific subsidiary. And, if you’re looking for an exit strategy…

The way out

Restructuring your company helps to secure the business’ future. By separating assets from continuing trades, specific components of the business can be sold without disrupting the rest of the group. So, if you’re looking to wind down your personal involvement within the business in the foreseeable future, taking steps to create a structure that’s commercially functional and flexible is a no-brainer.

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The Why Not

Of course, the above discusses just one way of restructuring a business to the benefit of its stakeholders. But a restructuring effort is not something that is suitable for every business, nor is it a process that should be rushed, or rushed into. There are plenty of pitfalls that could catch you off-guard.

There’s no doubt that the increased number of filings required – at a bare minimum, the new company’s Confirmation Statement, Corporation Tax return, and year end accounts – and the associated accountancy fees would be off-putting to the more frugal of you, and the idea of licencing paperwork or negotiating with lenders sounds particularly unappetising.

Additionally, if your business currently operates multiple ‘sister companies’ with differing shareholdings and you wish to bring them all into the same group, the aforementioned exemptions and reliefs may not be applicable.

After all, sometimes keeping things simple is the best approach. Therefore, having a group structure isn’t suitable for every business out there.

The Next Steps

So, we want to hear from you. Has this short piece given you some food for thought? Still unsure about how restructuring works, or perhaps have your own stories from the world of business to share? Whatever the weather, you can always get in touch with one of the team here and we’ll get back to you.

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