7 April 2016
Most advisers have had, at some point, a client state that their friends have advised them to place their company (ies) in a group with a holding company. However, a group structure is not going to suit every business and is often an unnecessary exercise just to give, perhaps, a perception of size.
So is this only for the multi million pound/international businesses? The answer is no. In short, a holding company is essentially a company which owns shares in subsidiary companies.
Why would you have one? There are a number of reasons why you may have a group structure, whether it is for tax purposes, protection of valuable assets or perception. It is a particularly tricky subject so I have made a small bullet point list below of what I believe the advantages and disadvantages are:
- Any losses made in the group companies can be offset against each other to minimise the Corporation Tax payable (subject to certain levels of shareholdings).
- Sales of subsidiary companies could be made tax free under the Substantial Shareholding Exemption. Please note – this exemption is under consultation.
- The most valuable assets (such as equipment, land or IP) can be ‘ring fenced’. This reduces risk, and is commonly the main reason for a group structure.
- If company expansion is foreseeable (especially overseas), the structure allows efficient ownership and control of a large number of different companies, perhaps involved in different industries and registered in different countries.
- It is far less complicated to dispose of a separate company than a department of a larger business.
- You can incentivise key employees by putting managers on the board of a subsidiary to give board level experience or granting shares in subsidiary companies without diluting ownership of the main assets.
- It allows you to seek joint venture partners and equity investors for specific projects and activities without having to offer a stake in the entire business.
- The existence of a group structure gives reassurance and a perception of a large outfit.
- It is more convoluted and many people prefer the simplicity of a single trading company.
- There is more administration as you need separate accounts, PAYE, VAT (although it is
possible to group register). This inevitably leads to higher costs!
- The perception of a large outfit may put off some people and have the opposite effect.
This is a particularly complex area and I could say more on other considerations such as transfer pricing, though I hope that this gives food for thought and maybe put some misconceptions to bed!