Corporate Groups Money Saving Ideas

In this final guide in our series looking at operational cost saving, we look at the use of corporate groups.

It follows on from Parts One and Two which looked at 8 ways to save staff costs without making redundancies and Implementing redundancies fairly to save staff costs.

Companies that are members of a group or shareholders thinking about forming a group may want to consider some of the points in this note which is split into Commercial considerations and Tax issues.

Commercial considerations

1. Creation of a corporate group

A corporate group can be as simple as a holding company and a subsidiary. The holding company may own the valuable assets such as property and Intellectual Property (“IP”) while the subsidiary carries on the trade. The property and IP may be ring fenced from the trading subsidiary if the subsidiary gets into financial difficulty. The shareholders will have to consider the publicity and future trading issues, such as lack of credit from suppliers, if a subsidiary is “let go”. In addition, you should watch out for intra-group guarantees being including in Terms and Conditions, in particular, involving banking and finance arrangements.

A corporate group can also benefit from shared services such as HR, finance and administration with appropriate cross charges being made for the services thereby reducing costs at different levels when output can be done from one centralised function.

2. Rationalisation of an existing company

It can be very easy to add new companies to a group structure, perhaps as a way of buying out minority shareholders in the past by using a new holding company. You can be left with a raft of intermediate companies that do not do anything and just add to the group complexity.

You may want to consider winding up dormant companies and “tidying up” the group. Do check beforehand if there was a reason for the company in the first place (perhaps a complicated tax structure from several decades ago) and whether that dormant company should be retained to avoid triggering an unexpected tax liability.

Having a leaner and more structured group is also more beneficial to potential buyers who then don’t have to spend money on due diligence on now defunct companies.

3. Restructuring inter-company debt

Consider converting loans from a parent company to a subsidiary into equity or shares in a “debt for equity” swap. This may strengthen the balance sheet of the subsidiary and get rid of a debt that has no prospect of being repaid.

Consider different finance providers who may offer more commercial lending terms in exchange for some equity in the business. It may be worth sacrificing some equity in order to achieve better lending rates on a short to medium term basis.

4. Commercial contract efficiencies

Carry out a review of all long term contracts. Long contracts may be more expensive, and negotiations may result in cost savings being available. The opposite may be true given the recent high inflation – as ever, the devil will be in the detail!

Look to negotiate price adjustment provisions, break options and periodical contract review dates.

Tax issues

1. Formation of corporate group

Corporate groups can be created with the ownership of a 51% shareholding in a company. However, the benefits of the various tax reliefs for corporate groups require at least a 75% shareholding and an indirect shareholding of 51%. For example, A owns 75% of B which owns 75% of C and C owns 75% of D. In this example, A owns a 56% shareholding in C but owns less than 51% of D. Therefore, A, B and C are a corporate group but not D. A separate group could be formed of B, C and D. It is much more straightforward when 100% shareholdings are in place.

2. Corporation tax rates

The reintroduction of the lower rate of corporation tax (19%) when the current 25% rate of corporation tax was brought in on 1 April 2023 has brought back the need to consider the number of companies within a group. The 25% rate of tax starts at £250,000, with the 19% rate being limited to the first £50,000 of profits. Profits between £50,000 and £250,000 are subject to a sliding scale with the effective rate of tax on the £200,000 difference being 26.5%.

The tax bands have to be divided between the number of companies within the corporate group with the result that one company could pay a lot more tax that it’s fellow group members. Removing unnecessary companies from the group may reduce the overall corporation tax bill – just look into the reason for the formation of the company in the first place.

Also be aware of the effect of associated companies, sometimes referred to as “sister companies” and the effect these companies can have on the corporation tax bands.

3. Intra group transfer of assets

Assets such as property can be transferred on a no gain no loss basis between group companies. This means the transferee company will take on the base cost of the property (plus any indexation allowance) rather than the transferer company being liable for corporation tax on any increase in value at the time of transfer. The transferee company will pay tax on any historical gain when it sells the property (or is sold out of the group within a six year period).

Relief from stamp duty land tax (for land in England) and land transaction tax (for land in Wales) is available for transfers between group members by ticking the relevant box on the return form. Records should be retained to prove the relevant group relationship.

Relief from stamp duty on transfers of shares in group companies is available although an application has to be made to the Stamp Office of HM Revenue & Customs.

4. Group relief

Group relief allows for the transfer of losses between group members so that profits can be reduced and less tax paid. Group relief must be claimed on the corporation tax return although payment does not have to be made to the company transferring the losses. Remember, there are restrictions on the use of losses in companies purchased into the group.

5. VAT groups

A corporate group does not automatically mean that a VAT group has been created, an application has to be made to HMRC. Transactions between VAT group members are not subject to vat (the VAT group is treated as one vat entity) although members of a VAT group do have joint and several liability, so any group member can be liable for the vat payable by the group. This can be very important when buying a company from a VAT group as it will have a historical liability.

6. Prop Co Op Co structures

A property company can own the property which is rented to the trading company. This can ring fence the liabilities of the trading company and protect the value of the property. It also means the purchase of a property can be treated as a transfer of a property rental business as a going concern and avoid the need to pay vat on the purchase price of the property (which also increases the SDLT or LTT liability). A Prop Co Op Co structure cannot be set up within a VAT group.

7. Tax avoidance

As with all taxes, there are restrictions and potential claw backs of corporation tax on chargeable gains and stamp taxes if companies leave a group holding property or assets acquired from other group companies within certain periods of time. Care should be taken when looking to sell subsidiary companies to check that it has not acquired assets within a period of up to six years before the sale. The general anti-avoidance legislation should also be considered.

If you have any questions on the matters raised in this Guide, please do not hesitate to contact the Corporate Team.

You can also watch our webinar recording “Employment Powerhour – The benefits of corporate restructuring 12th July 2023“