The circumstances that lead a business to consider restructuring vary considerably, but the most common reasons we see include:
One of the most straightforward and commonly used restructuring tools is the insertion of a new holding company above an existing trading company. In simple terms, the shareholders exchange their shares in the trading company for shares in a newly incorporated holding company, which then owns the trading company as a subsidiary.
Done correctly, this exchange of shares qualifies for relief under the share-for-share exchange provisions, meaning no taxes should arises at the point of restructuring. The holding company structure then creates a platform for a range of planning opportunities: issuing shares in the holding company for employee share schemes, managing dividends and cash within the group in a tax-efficient way, or facilitating a cleaner exit when the time comes.
The Companies House filings, the share exchange agreement, and the way the transaction is documented all matter. An advance clearance application submission to HMRC is strongly advisable.
We would always strongly advise that clearance is obtained from HMRC prior to undertaking a company reconstruction. This isn’t an admission that the transaction is aggressive, it’s simply good practice, and HMRC expects it. The application sets out what is being done and why, and HMRC’s confirmation provides a level of certainty that protects the business and its shareholders if questions are raised later.
We have considerable experience preparing clearance applications and managing the process through to a confirmed response. Where HMRC raises questions or requests further information, we handle that correspondence on your behalf, and we make sure the subsequent implementation follows the steps as confirmed.
A demerger involves splitting a single business into two or more separate entities. This is more complex than inserting a holding company, but it’s a well-trodden path with established routes through the legislation and, again, reliefs that mean it can often be achieved without triggering a tax charge if structured appropriately.
The three main routes are:
Available where a trading company distributes shares in a subsidiary to its shareholders as a dividend. This route is relatively clean and doesn’t require a liquidation, but it comes with eligibility conditions: both the distributing company and the entity being demerged must be trading companies or holding companies of trading groups. Investment properties or non-trading activities can prevent this route being available.
A more flexible route that uses a reduction of the company’s share capital to transfer assets or shares to a newly formed entity, which is then distributed to shareholders. This has become the preferred approach in many situations because it can accommodate a wider range of circumstances than the statutory demerger route, including where investment assets are involved.
Historically used where other routes weren’t available, this approach involves placing the company into members’ voluntary liquidation and distributing assets to separate companies owned by the shareholders. It’s less commonly used now that capital reduction demergers are well established, but it remains an option in certain circumstances.
In all cases, HMRC clearance should be sought before the transaction proceeds. This involves setting out the proposed steps and the commercial rationale, and asking HMRC to confirm that it won’t counteract the tax advantages of the arrangement under the anti-avoidance provisions. Getting that clearance in place gives all parties certainty before anything is implemented.
If you’re considering a restructuring of any kind, whether it’s a straightforward holding company insertion or a more complex demerger, get in touch with our expert tax team to see how we can help.
We love meeting new, exciting businesses. Get in touch with our team to see how we could enhance and protect your financial position.
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