Top tips for tax effective diversification strategy for your business

Whether branching out through the introduction of a complementary product, entry into a new market or an acquisition, this new challenge gives the company and its owners, the opportunity to take stock of their current operating and legal structure and consider whether this meets their requirements both now and in the future.

Any corporate restructure or reorganisation can give rise to a range of tax issues which will require careful consideration and planning and should be considered alongside both the company and individual owners short, medium- and longer-term goals. In the case of a family-owned business, typically they will have to consider both the need to effectively manage the business (growing turnover, maximising profits, retaining and motivating key staff and raising capital) as well as the longer-term family strategy for retaining and protecting wealth.

While involving some upfront cost, a reorganisation to achieve the right operating structure can often lead to significant savings and create opportunities for a business to grow and innovate in the medium to longer term as well as providing the opportunity to implement the most appropriate overall ownership structure to manage the interaction between family and management.

Some of the most common objectives of a group reorganisation are:

1. To simplify a corporate structure

Many group structures develop over time due to historic acquisitions. Often there can be several group companies carrying on similar activities.

A simplified group structure can save management time, improve efficiency and reduce compliance costs.

Having more companies than needed can bring additional compliance costs such as preparation of accounts, Companies’ House and tax filings etc. It can also absorb management time in matters that do not generate profit, for example where intragroup transactions have to be monitored and recorded.

2. A pre-sale step for the sale of all or part of the group

Simplifying a group structure can make it more attractive for a sale. By removing unnecessary dormant companies and generally tidying up your group means a buyer’s due diligence has to be carried out on fewer entities. A simple group structure can also contribute to an overall lower risk control environment assessment when a buyer is looking for protection against historic tax matters.

Alternatively, where only part of a business is to be sold, a group reorganisation may involve transferring either the part to be sold, or sometimes the part of the business to be retained, into a new company by ’hiving down’ the assets to be sold or demerging the assets into a new separately owned entity.

3. To create a suitable structure to support an acquisition or international expansion strategy

As groups grow, they may need a group holding structure to facilitate external funding or to provide some legal/structural protection for the established part of the business from new ventures. This can typically involve putting in place a group holding company, and possibly intermediate holding companies and a group finance company.

4. To allow for succession planning or to assist dissenting shareholders

In family-owned businesses it can be quite common that second or third generation family members may have interests in different parts of the business, or family members may want to take the different parts of the business in different directions. The same can occur with shareholders who are not related. A reorganisation involving a demerger can facilitate the different personal objectives of shareholders.

5. To separate out the property investments from trading activities

The use of Property Company/Operating Company (PropCo/OpCo) structures can be attractive when raising bank debt as it allows the risks associated with the trade to be ring-fenced within the trading vehicle and separating out the Property investment. This can also be a pre-cursor to exit or succession planning as shareholders may wish to divest/sell the trading business but keep an interest in the property.

6. To provide asset protection

Similar to a PropCo/OpCo structure, a group reorganisation can mean that assets or businesses that shareholders want to protect can be held separately from the riskier parts of their business.

Some or all of the above reasons could be applicable depending on the nature of the proposed diversification, and longer term corporate and personal goals. However, regardless of the objectives, it is essential that any reorganisation is undertaken with proper consideration of the potential legal, commercial and tax implications.

For example, there are a number of tax reliefs available which can minimise or eliminate tax charges arising as a consequence of a reorganisation. Many of these reliefs have specific rules and conditions attached to them. The key will be getting the right advice to navigate through any restructuring, reorganisation, merger or demerger to ensure that it is conducted in the most tax efficient way possible. Getting it wrong can led to unexpected surprises and tax costs.

Our co-ordinated, cross disciplined restructuring approach will ensure specialist advice is sought across a range of taxes including corporate finance, corporation tax, VAT, employment taxes and stamp taxes. We can even help with the accounting, to model the impact of the reorganisation on your published accounts.

For more information on the topics addressed in this article or to discuss your individual circumstances, get in touch with Trevor Ling or your usual Crowe contact.