Is it time for business reorganisation?

Running a business in today’s world can be challenging, especially after the disruptions of the past few years. However, with change often comes opportunity, which means now could be the perfect time to reorganise.

Many businesses are now in a position to rethink their strategies and explore exciting new possibilities, or they may be looking to do so in order to adapt and manage the forthcoming fiscal changes coming towards them.

Whatever a business’ position, reorganising its financial structure could provide the perfect catalyst for future growth. Economic times might be challenging but there are many options and solutions available that can help you to make your business can thrive.

Businesses on a smaller scale

For some businesses, scaling down the enterprise is a way to survive throughout difficult times, with the core of the business intact but on a smaller scale. For example, where property is sold realising a capital gain in the same period as a trading loss is made, allowing the two to be offset for tax purposes.

Groups of companies; tax considerations

So, what if the business was previously operating through a small group of companies, perhaps with each business doing something similar but slightly different? If one of the businesses has ceased or decreased significantly in size, consideration could be given to reducing the number of companies in the group. There are different ways of achieving this in a tax neutral way. Benefits of a more streamlined group structure include lower professional fees as well as operational efficiency consolidating tasks and avoiding duplication for each group member.

Condensing a group of companies can be done by way of a hive-up of trade and assets into a parent company, hive across to another group company, sale, capital reduction and strike off, liquidation, distribution of shares in specie or a concoction thereof. The method you choose to achieve your aim should not be driven primarily by the tax outcome, but this should always be a key consideration.

Redundant entities in a group can be removed by way of strike off or members voluntary liquidation. However, the costs and features of these alternatives should be investigated to ensure the right method is selected; the tax treatment of distributions differs as well as the legal protection afforded by the two routes.

At Mercer & Hole, we have the expertise in advising businesses in the complicated transactions associated with consolidating or condensing a group of companies to ensure that business owners make positive tax savings where possible and that stakeholders are satisfied with the outcome.

Sometimes bigger can be better!

Although the global economy has been particularly turbulent in recent years, some businesses have managed to diversify and thrive. With this, they might need help in managing their new growth and the set of different opportunities and challenges it has brought.

Separate revenue streams

Although times have been tough for many, some businesses have diversified or thrived and have found themselves needing to focus on managing their new growth.  Although a business can operate with different income streams within the same legal entity and account for and recognise these on a divisional basis, there is sometimes a need to ringfence different activities.  The need can stem from a commercial perspective as regards risk or perhaps a different angle such as wanting to construct teams who have clear visibility of their output and a separate ‘identity’.

Options for business reorganisation 

A business can reorganise itself in many ways to accommodate the new needs, such as demerging in order to create new entities, potentially even with different ownership. This can create a new subsidiary and hive down a ‘business unit’ into the new entity. Of course, not all businesses operate within a corporate entity and smaller unincorporated businesses that have experienced significant growth may wish to incorporate either for organisation purposes or perhaps to protect it with limited liability that was not previously in place. This can be managed with no tax cost using what is known as ‘incorporation relief’.

There may be opportunity to acquire a completely new business which could take the form of a purchase of shares or, alternatively, of trade and assets. Both approaches carry different risks and rewards and buyers are well advised to undertake appropriate levels of due diligence work before going down either route.

A larger operation often calls for a review of whether the infrastructure is fit for purpose and although we would advise any business to have a business plan, this is never more important than when a business is growing, transitioning or becoming more complex. In every business owner’s busy life, it is advisable to take time out to think and to plan.

Change in business ownership

Another reason a business may be looking to reorganise is to reflect new ownership. At Mercer & Hole, we work closely with business owners wanting to pass on their business. Succession planning is often overlooked but is a key consideration in the lifecycle of a business.

Sell your shares 

Selling a stake in a business can be achieved in the corporate environment by way of a company share buy-back. However, this presents some challenges to structure and is often avoided in favour of a ‘new company’ route. The ‘new company’ route also presents an opportunity to introduce new investors or shareholders and focus everyone on thinking about incentive plans such as the Enterprise Management Incentive which enables share options to be issued in a tax-efficient framework.

An outgoing shareholder may simply wish to de-risk their investment in the business and realise the existing value. Once an individual has value in the form of cash rather than shares, it is then possible to think about where those funds should be invested or used and undertake a personal wealth planning exercise. Planning your personal position is crucial to ensure that loved ones are taken care of and that you can achieve your goals in retirement, such as travel or investment.

Taxes and other considerations for corporate restructuring

Reorganisation of a business structure is always possible and should be driven by the commercial need, but tax will always be a key factor to consider. When we say ‘tax’, we are actually referring to many different types of tax including: capital gains tax, corporation tax, income tax, VAT and Stamp Duty. These are just a few to take into account before considering the wealth of anti-avoidance legislation that HMRC have in their armoury to challenge transactions in certain circumstances.

There is often a way to ensure that a transaction is both tax neutral and cleared by HMRC before execution. Where there is a tax cost this can be identified and built into the decision-making process as to how to proceed. In addition to tax considerations, there are legal and financial matters to think about, for example, change of control clauses in leases, movement of funding arrangements, the impact on employee incentive arrangements to name just a few, but this can all be managed with the right advice and support.

Choosing the right team

If you are a business owner and you are in a situation where you need advice – whether it be scaling down, restructuring, franchising, selling or buying shares – you need the right team around you.

We always stress the importance of planning early if you can. However, having access to the right expertise is essential. At Mercer & Hole, we can help at any stage of the business cycle and personal tax journey. We take the time to get to know you and your business, which allows us to provide the bespoke business support and advice needed to ensure that all stakeholders are happy and, most importantly, provide the best outcome. The world economy is turbulent and is likely to remain so for the foreseeable future, but we can help you adapt in the right way for your business and personal situation.

Please get in touch with your usual contact at Mercer & Hole or Jacqui Gudgion or Mark Baxter to find out more about how your business could benefit from reorganising.