The pros and cons of setting up a group structure

20 April 2023

Mark Friend

Building & Construction, Reducing Tax, Structuring a Business

Two common misconceptions about group structures are:

1) They are set up for tax reasons, and
2) They are used only by big corporate companies.

In truth this is far from the case.

Whilst tax can be a significant reason for setting up a group structure and in certain circumstances can be essential, for example in a management buyout, it is not the only reason.

Similarly, whilst large companies will often set up group structures to include overseas operations etc… it is not just big businesses that can benefit from a group structure, small and medium sized (SME) business owners can equally benefit.

In this blog we skim the surface of why an SME business owner might consider a group structure and the pros and cons of setting one up.

What is a group structure?

In simple terms it is when one company (directly or indirectly) owns one or more other companies.

Why would an SME business owner set up a group structure?

This is where it gets interesting.

You have to look at some of the most common problems a business owner faces.

Let’s look at three different examples.

De-risking a business

Situation

John has built up a highly successful construction business. He has bought plant and equipment and has cash in the bank.

Problem

His projects are risky, many are sizeable and he is aware that just one big commercial dispute or a client going down (e.g. Carillion) could mean he loses everything.

What can he do?

Solution

John could set up a group structure, with a new holding company owning his construction company and a separate plant hire company.

Assets in the construction company such as cash and plant and machinery can be paid to the holding company via a dividend or transferred to other group companies.

Provided intercompany loans from the construction company are not set up all the risk can be ring fenced and the assets extracted.

Wanting to engage a business champion

Situation

Mary has built up a highly successful online retail business and now wants to set up a separate retail business stocking a whole new range of products.

The new business will need funding from the existing business. She has found someone to work with her on the new business enterprise and wants to give her a stake in the new business.

Problem

Mary doesn’t want to giveaway a stake in her existing business which she has worked so hard to build.

Solution

Mary could set up a group structure with a new holding company which would then own her business.

The existing business could transfer profits to the holding company via dividends which could then be loaned to the new trading company.

The new trading company could be owned 80% by Mary’s holding company with the remaining 20% owned by her new business partner.

Mary thereby retains 100% control of her existing business and 80% of the new company.

Setting up new ventures

Situation

Tom and Sally run a successful car repair garage but have a passion for vintage cars and have decided they want to set up a car hire business specifically for vintage cars.

Problem

They want to operate each business completely separate so that they can measure profitability and potentially sell their garage business off in say five years’ time and concentrate on vintage cars.

Solution

Tom and Sally could set up a group structure with a new holding company and a separate vintage car hire business.

Cash in the garage business could be passed up to the holding company via dividends and loaned to the new vintage car hire business.

Each company keeps their own records and in due course the garage could be sold off as a separate entity with no tax liability (substantial shareholding exemption – a tax advantage!!!), provided the proceeds remain in the holding company.

So is a group structure right for you?

The above are simple cases, as with all planning there are always pros and cons.

Pros Include:

• De-risking a business- ring fencing high risk trades and finance and protecting assets.
• Setting up champions for different trades.
• Better monitoring of individual trades.
• Movement of assets within a group structure with no tax implications.
• Utilisation of losses in one company against the profits of another group company (assuming group relief available)
• For specialist funding projects – for example in property development if you had a big financing project the lender may want their security in a separate commercial vehicle.
• For VAT purposes to simplify matters where you may have exempt services as well as vatable ones.
• Tax advantages in the utilisation of profits and the avoidance of the need to extract profits out of the group. Potential future tax advantages in the sale of subsidiary companies and getting substantial shareholding exemption.

And some of the cons:

• Tax disadvantages. Group companies will be connected for tax purposes and can have significant disadvantages in respect of when you pay tax liabilities and the rates which could apply.
• Overhead costs such as accountancy, insurance, book-keeping, bank charges etc… will increase.
• There will be one-off set up costs for the group – seeking clearances etc…
• Increased complexity of managing more than one business.
• Potential future tax disadvantages in the sale of subsidiary companies and not getting business asset disposal relief (formerly called Entrepreneurs’ Relief). Whilst profits on the sale of a subsidiary may incur no tax at the time of sale, the proceeds are trapped in the holding company and you may have to incur far more tax to extract them than if you had sold a separate independent trading company.

Weighing it up

The above is not an exhaustive list of pros and cons – just some examples.
Group structures very much have their place for SME business owners who operate successful businesses or are looking to grow.
Setting up a group structure involves getting specific clearances from HMRC so please take professional advice.

Getting in touch with us

If you would like to find out more about how we can help you to build a group structure for you then please contact Mark Friend or call us 01634 731390.