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17 February 2021

How to choose a Tax Efficient Corporate Structure

Tax should always be taken into account when choosing and/or reorganising your corporate structure, explains PKF-FPM Director Malachy McLernon.

When deciding how to operate a business in the UK, there are four main structures to consider:

  • Sole trader
  • Partnership
  • Limited Liability Partnership (LLP)
  • Company

Factors to take into account when deciding on the best structure for your business include commercial considerations, the need for limited liability, and the tax consequences of your decision.

Choosing the right structure when you are starting up a business doesn’t mean that you won’t need to change it at a later date.


Reasons to Change your Business Structure

Elsewhere on this website, in an article on ‘shaking up your business’, my colleague Michael Farrell explains that it is important to review your corporate structure at least once a year to ensure that it continues to be appropriate for your needs. Michael lists examples of situations where a change in structure might be needed, such as:

  • outgrowing your existing structure
  • requiring new revenue streams
  • entering a new market.
  • raising capital for business development.
  • acquiring or merging with another business.
  • taking on a new partner or expanding your management team.

Other situations where you might need to reorganise include:

  • changing your share structure;
  • transferring assets within a group;
  • acquiring or selling a subsidiary;
  • splitting the business; and
  • making a large one-off return of value to shareholders.

Corporate structure and tax planning

When changing your corporate structure, it is important to examine the tax consequences before finalising your decision. This will help ensure that you achieve your objectives in the most tax efficient way possible.

Set out below are 10 examples of situations where a change in corporate structure can have significant tax consequences.

  1. Ring-fencing valuable assets – often companies hold valuable assets which can be at risk if the business experiences a downturn in trade, or is subject to any form of litigation. Transferring valuable assets such as property, IP, plant & machinery or surplus cash into a separate company within the same group can protect these assets from business risk.
  2. Inserting a holding company – subject to certain conditions, a holding company can generally be inserted above a single company tax-free. It is possible to obtain pre-transaction clearance from HMRC so as to be certain of the tax position before proceeding.
  3. Selling a non-core business – a company may have various activities in the same entity. If one of these becomes non-core, it may be advantageous to separate it out from the ‘main trade’ perhaps in anticipation of a sale.
  4. Allowing shareholders to go separate ways – irrespective of their best intentions at the outset, business owners can and do fall out and owners may wish to go their separate ways. A reorganisation can help owners achieve their objectives in a tax-efficient manner.
  5. De-merging business assets into separate corporate groups – A demerger separates business assets or interests into standalone entities. There are various ways to achieve this including liquidation, share capital reduction, and statutory demergers. When demergers are correctly structured they are tax-efficient (often tax-free). Obtaining pre-transaction clearance from HMRC provides certainty for business owners.
  6. Separating divisions – Entrepreneurial business owners often build up a number of different business activities in a single company. This can lead to several different trades operating alongside each other, even if they do not necessarily sit well together. Separating these activities out into a standalone division within a group can be a reason to change the corporate structure.
  7. Transferring trade into a subsidiary – Another way to separate out a business activity is to transfer the relevant trade and assets into a new subsidiary company. This can usually be achieved tax-free if the change in structure is correctly planned. The subsidiary can then either remain within the group or be sold.
  8. Incorporating a dormant subsidiary – This is a straightforward way to form a group and can protect a company name that you may want to use in the future. Forming a group may also enable your company to avail of certain tax reliefs.
  9. Incorporating your sole trade/partnership business – If you operate a sole trader or partnership business, it may be worth considering incorporation as this provides limited liability protection as well as the kudos of operating a limited company. When planned correctly, incorporation can be achieved tax free and may deliver tax benefits both at the time of the incorporation and when the tax on future profits arises.
  10. Qualifying for tax reliefs – There are various tax reliefs for companies that are part of a group—for example, subject to certain conditions, the sale of a trading company can be exempt from corporation tax, When reorganising your business, it is therefore worth considering whether it could be advantageous to put a group structure in place.

 

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Should I change my corporate structure?

While achieving commercial objectives is usually the primary driver of decisions to change the corporate structure, achieving a tax-efficient outcome is also critically important. Of the four main structures listed at the outset of this article, the company structure provides the most flexibility when it comes to tax planning. Although setting up and running a company involves more formalities than operating a sole-trade, partnership, or LLP, income tax can be deferred if profits are retained in the company.


When contemplating changing your corporate structure, there is no substitute for obtaining professional advice from an experienced professional who can guide you through the benefits and pitfalls. For more information and/or assistance, please contact our Tax Team who will be pleased to help you.

 

 

Contact Malachy

Malachy McLernon / Director

m.mclernon@pkffpm.com

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