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Group reorganisations and demergers

Jane Mackay, Partner, Head of Tax
13/08/2020
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A group reorganisation involves upfront cost to achieve but can result in significant savings in management time and compliance costs. It can also result in a group structure that is more attractive for sale or investment.

Investing to make sure you have the right structure to achieve your strategic objectives could provide you with the advantage necessary to succeed as businesses innovate and compete to get back on track. 

What is a group reorganisation or demerger

A group reorganisation is the term used to describe the transfer of assets, which includes a business or part of a business, or the transfer of shares usually from one company to another.  

Why undertake a group reorganisation?

Some common reasons for a group reorganisation include:

1. To simplify a corporate structure

Many group structures develop over time due to historic acquisitions.  Often there can be several group companies carrying on similar activities.

A simplified group structure can save management time, improve efficiency and reduce compliance costs.

Having more companies than needed can bring additional compliance costs for example for preparation of accounts, Companies’ House and tax filings etc.  It can also absorb management time in matters that do not generate profit, for example where intragroup transactions have to be monitored and recorded.

2. A pre-sale step for the sale of all or part of the group

Simplifying a group structure can make the group more attractive for a sale.  For example, eliminating unnecessary dormant companies and generally tidying up your group can mean a buyer’s due diligence has to be carried out on fewer entities. A simple group structure can also contribute to an overall lower risk control environment assessment when a buyer is looking for protection against historic tax matters.

Alternatively, where only part of a business is to be sold, a group reorganisation may involve transferring either the part to be sold, or sometimes the part of the business to be retained, into a new company by ’hiving down’ the assets to be sold, or demerging the assets into a new separately owned entity.

3. To create a suitable structure to support an acquisition or international expansion strategy

As groups grow, they may need a group holding structure to facilitate external funding or to provide some legal/structural protection for the established part of the business from new ventures. This can typically involve putting in place a group holding company, and possibly intermediate holding companies and a group finance company.

4. To allow for succession planning or to assist dissenting shareholders

In family owned businesses it can be quite common that second or third generation family members may have interests in different parts of the business, or family members may want to take the different parts of the business in different directions.  The same can occur with shareholders who are not related.  A reorganisation involving a demerger can facilitate the different personal objectives of shareholders.

5. To separate out the property investments from trading activities

The use of ‘PropCo/OpCo’ structures can be attractive when raising bank debt as it allows the risks associated with the trade to be ring-fenced within the trading vehicle and separating out the Property investment. This can also be a pre-cursor to exit or succession planning as shareholders may wish to divest/sell the trading business but retain an interest in the property.

6. To provide asset protection

Similarly as for the PropCo/OpCo structure a group reorganisation can mean that assets or businesses that shareholders want to protect can be held separately from the riskier parts of their business.

 How do you effect a group reorganisation? 

Hive down or transfer of trade

A group reorganisation will typically involve one or more transfers of trade and assets. The transfer of a trade and assets is often referred to as a ‘hive down’ of the trade.

Normally tax considerations will be key to deciding how to achieve the desired structure

Generally, a hive down of trade and assets can be achieved tax neutrally, provided both the transferor and the transferee entities are within a UK tax group. Where the companies are not in a UK tax group, but are under common control, there are tax rules that can mean many assets transfer tax neutrally. However, capital assets and intangible assets would transfer at market value for direct tax purposes so need careful consideration to avoid realising a taxable gain/profit on the transfer. Where there is a corporate group, it should be possible to transfer property assets without triggering Stamp Duty Land Tax (SDLT). However, care will need to be taken regarding any potential clawback events.

A hive down does need to be carried out carefully and in a systematic way so as to avoid unexpected tax consequences, and to identify any tax claims/elections that may need to be made in the companies’ UK corporation tax returns to access the tax neutral treatment. You will also need to consider accounting implications, and there are legal requirements to document the transfers that need to be dealt with. 

Areas that typically can cause tax concerns on a hive down include:

  • VAT registrations and ensuring the hive down meets the conditions to be a Transfer or a Going Concern (TOGC) for VAT purposes
  • tax trading losses and ensuring they remain available to carry forward post hive down
  • intercompany balances and avoiding taxable waivers if they are not cleared in advance
  • capital allowances planning and property transfers
  • moving assets from stock to fixed assets thereby creating a dry tax charge
  • creating potential future SDLT clawbacks
  • future de-grouping gains – although recent changes to the SSE rules mean planning can often mitigate de-grouping gains.

This checklist [pdf] sets out some of the other issues that business typically need to consider on a hive down.

New holding companies and demergers

Where a group reorganisation involves new companies and/or a demerger into separate groups it is likely that tax clearances from HMRC will be recommended. HMRC has 30 days to respond to any clearance application so obtaining a tax clearance needs to be built into a project timetable.

How should you approach the steps to completing a group reorganisation project?

Typically a group reorganisation would be approached as follows:

  1. Feasibility report – This phase of work sets out in overview how the group restructure is to be achieved. From a tax point of view, it highlights tax areas requiring consideration, and at a high level the order of steps, it also highlights where tax liabilities may arise either on the restructure or at a later date so that where possible they can be managed.

  2. Tax clearances (if available) – Where available obtaining tax clearances from HMRC gives some assurance to the taxpayer that HMRC accept the reorganisation is for bona fide commercial reasons. Having a tax clearance can make the process for claiming any Stamp Duty reliefs simpler and can make it more likely that any tax returns reporting the transactions are accepted without question by HMRC, because the steps have been reviewed by HMRC as part of the advance clearance process.

  3. Detailed steps plan – The steps plan sets out what needs to happen and in what order to effect the reorganisation. It will normally set out what the tax analysis is, the reporting that will need to be made to HMRC and the expected accounting treatment. Where lawyers are involved in a group reorganisation, a steps paper can help map out what documentation is required to effect each step. A detailed steps paper can be helpful when it comes to accounting for the transaction or explaining to third parties (such as banks or funders) what the reorganisation involved and that it did not involve “aggressive tax planning”.

  4. Implementation – If steps 1 to 3 above have been completed, then the implementation phase will usually involve ensuring that the documentation and accounting for the reorganisation is consistent with the agreed steps. Working with an experienced corporate lawyer can help the implementation run smoothly and ensure that the final structure correctly reflects the agreed steps,

  5. Reporting to HMRC – Once the restructure is complete it is important to remember any tax reporting or elections that may need to be made.These include tax elections to transfer assets at an agreed value, claims for Stamp Duty or SDLT reliefs and employment related securities reporting where new shares have been issued to individuals

For more details or to discuss a group restructure or hive down please speak to Jane MacKay, Rob Gunn, Simon Crookston or Caroline Fleet or your usual Crowe contact.

Contact us

Jane Mackay
Jane Mackay
Partner, Head of Tax
Thames Valley