To meet the evolving commercial, financial and legal objectives, there will be times when a business may need to review and revisit its corporate structure.
Many firms turn to business restructuring during difficult times, but restructuring can also be beneficial for those looking to increase profits and reduce tax liabilities at any time in their life cycle. It is also often required for specific reasons, such as in preparation for a sale or acquisition, or to safeguard assets.
There are many reasons and circumstances when a business may want or need to restructure. If you’re considering business restructuring, here’s our complete guide.
Types of business restructuring
The type of restructuring a business may undertake will depend as much on their individual circumstances and what they wish to achieve. Whilst each brings a set of challenges, they also bring clear benefits. There are four main types of business restructuring:
Demerging and splitting a group structure
As a business grows, the objectives of the different sectors of that business may no longer align, or perhaps there are shareholder differences that cannot be resolved, or it could be that there is a large property that needs to be removed from the group. In these circumstances, it may be better if the companies operated separately. This would allow the different sectors in a business to be split with the creation of subsidiaries. This may also be beneficial when a company is looking to sell part of its business.
Consolidating businesses into a group structure
On the other hand, expansion may have led to several related businesses operating separately that would operate more effectively together. Consolidating and simplifying the group structure could reduce the costs of running separate companies, with less administrative roles required, and key staff can focus more on their day to day business.
Establishing a new holding company
This will allow the company to own shares or assets in subsidiaries where the holding company can have management and control over the subsidiaries.
The reorganisation of shares can include capital reductions, alterations of rights or purchasing existing shares. This may be sought when looking to attract new investment, or as a solution to resolve shareholder disputes or to facilitate succession planning.
Reasons to implement business restructuring
There are many different reasons a business may want to restructure.
1. Business acquisitions and mergers
When acquiring a new company or following a merger, it may be necessary to reorganise the corporate structure of a business to facilitate the new business to slot into the corporate structure.
2. Reducing risks
The formation of a new subsidiary or a company could reduce financial risk if there are concerns that a certain department may be loss-making.
If your business holds property assets (whether company premises or for investment purposes) holding these in a separate company will help safeguard these assets. Separating trade and property ownership will help protect the value of the property from uninsured liability arising from the trade side of the business.
3. Succession planning
Family businesses are usually run by passing down knowledge and expertise through generations. Transferring ownership can be a complicated and personal task. Succession planning ensures that timing is correct, for a business to pass as seamlessly as possible, whilst consideration can be given to how ownership is transferred, including share rights and that this is done in the most tax-efficient method possible.
4. Shareholder disputes
At times shareholders come to deadlock as to how to take a business forward or disagreements arise as to how a company should operate. This can have a negative effect on the businesses and affect both profit and morale. Restructuring, which could include demerger or share redistribution (with a shareholder being bought out), is an effective way to resolve these disputes.
5. Moving assets
There are several reasons why you might want to transfer assets. If a group structure is in place this can usually be undertaken in a tax-efficient manner.
6. Cost savings and increased efficiency
Consolidating multiple companies can facilitate a reduction in compliance costs, such as in the preparation of annual accounts and VAT and corporation tax returns. In many circumstances it can lead to a reduction in administration costs as processes (and the employees involved) can be reduced.
If a business decides to downsize during a restructure, it could consider outsourcing some of its operations during a restructure at a much cheaper cost than in-house roles might bring, such as payroll and financial management.
Restructuring can also be focused on bringing in new technologies to benefit a firm. New technologies are essential to growing a business and could significantly help to improve the efficiency of a business, providing further financial savings.
7. New investment opportunities
Restructuring can be beneficial if a business is looking to attract investment. For example, those who operate a limited company might find their external investment opportunities are limited, a simple restructuring of your business could open many more doors to external investment opportunities.
8. Improved employee satisfaction
Whilst many companies choose to reward employees with bonuses and other desirable perks, some go further and offer shares in the business.
Offering an employee share scheme is a great way to restructure for the benefit of a business and its employees. This is also an excellent method to increase employee loyalty and help increase employee retention.
Restructuring to become more tax-efficient
One of the key reasons to consider business restructuring is the tax-efficient benefits that could come with it. Reorganising the structure of a business can create tax advantages by creating a more tax-efficient corporate structure.
From a tax planning point of view, restructuring your business could significantly reduce your tax liability going forward. However, it is important to seek professional legal and financial advice to ensure that a reorganisation takes advantage of any applicable tax reliefs. Without careful consideration, restructuring could lead to an increased tax burden during the reorganisation process.
These tax liabilities can include stamp duty on the transfer of shares, stamp duty land tax (SDLT) on the transfer of any property, VAT and corporation tax on any income that is generated. It could also lead to the loss of any tax reliefs.
Thoughts from Alexander & Co’s tax partner
John McCaffery, Tax Partner here at Alexander & Co, leads a specialist businesses restructuring team. John explained that restructuring a business wisely will ensure that it becomes as tax efficient as possible and this can have a significant impact on future profits.
“For example, one advantage of restructuring to a group structure compared to operating through separate companies is that groups of companies are provided with certain tax exemptions and reliefs regarding transactions between group members (subject to certain conditions being met).
Certain tax losses and reliefs can be utilised across a group as opposed to just in the company in which they arose. These would not typically apply if the companies were not in a group structure.
Assets can usually be transferred between companies within the same group are deemed to take place on a tax neutral basis for UK capital gains tax purposes, allowing assets to be transferred between group companies without such gain arising.
Subject to certain conditions being met, there are also exemptions from UK corporation tax in relation to profits from a disposal of shares in a subsidiary and reliefs from stamp taxes on the transfer of shares and properties between group members.”
Our tax experts are here to help
For assistance with business restructuring and understanding the tax benefits that this may bring, contact our tax planning team for further assistance. Our team is here to advise businesses across the UK on the most tax-efficient restructuring options available to them.
For more information, call 0161 832 4841 or simply fill out the form below and a member of our team will be in touch.