Corporate Simplification

Entities are often found in corporate groups that are surplus to requirements; these may have been dormant for some years or replicate activities of other entities. Corporate simplification is the process of removing unnecessary layers (of one or more companies) from a corporate structure.

The benefits of a corporate simplification exercise can include: 

• a reduced corporation tax liability 
• a reduced administrative burden 
• the release of capital, allowing funds to be diverted to profitable business areas.

From April 2023, corporation tax rates are rising to a maximum of 25%. The rate and timing of tax payments, by way of quarterly instalment payments, being determined by the number of associated companies in a group. A corporate simplification process may assist in reducing a group’s tax burden.

The removal of surplus entities from a group structure can also reduce the administrative burden for compliance and regulatory reporting, as well as for filing statutory accounts and confirmation statements (which will no longer be required to be filed with the Registrar of Companies). Additionally, where relevant, the need to prepare and make corporation tax and VAT filings come to an end. It is estimated that each dormant entity typically has an administrative cost (direct and indirect) of between £5,000 and £10,000 per annum. A simplification process removes those costs.

Surplus entities can be wound down in the most tax efficient way by use of a solvent liquidation process, known as a Members’ Voluntary Liquidation (MVL) or by dissolution. While an MVL is more expensive than dissolution, the MVL process provides comfort that a statutory process of advertising for creditor claims, realising assets and distributing any surplus to the shareholder(s) has been followed. Further information on MVL can be found here.

Managing risk and efficiency

We work with management and shareholders to determine a strategy to achieve the objective of the simplification process, undertaking a project management role if required and identifying the risks. There are many benefits of using a licensed insolvency practitioner to help with the simplification. Benefits include: 

• improvements across the group in respect of transparency, corporate governance and accountability 
• certainty in respect of liabilities following a due diligence exercise 
• the group has a structure that is streamlined and easy to understand 
• a return of share capital and assets, a release of inter-company balances and a better flow of dividends paid 
• elimination of replicated activities across group companies 
• a reduction in transactional costs when refinancing or dealing with corporate change 
• streamlining of tax planning and exit planning.

Tax considerations

When looking to simplify a group structure, there are often tax considerations that need to be borne in mind to ensure that no unexpected tax charges crystalise as part of the process.

Here are some common areas for attention. 

• Will the dissolution or liquidation lead to a taxable distribution for the company’s shareholders? Within a group the substantial shareholdings exemption (SSE) will often apply leading to no capital gains tax crystalising, although this is not always the case. 
• Should a distribution or dividend take place pre-liquidation to move assets within a group? 
• Are there brought forward or current year tax losses in the company and can these be used before any dissolution of liquidation takes place? The commencement of either process will lead to the losses being ‘lost’ and becoming unusable. 
• Does the company own a property or property lease? How can this be moved tax efficiently to another group company or shareholder? 
• What assets and liabilities are currently on the company’s balance sheet? How can these be tax efficiently transferred or removed? Should this happen before the liquidation commences or as part of the liquidation? 
• It is common for intercompany, or other loans, to be in place – do these need to be repaid, novated or written off and how can this be achieved without crystallising a tax liability for the company or another connected entity or party? 
• If a company has a loan from its parent company, it can often be advantageous to capitalise this loan to remove it, although there are risks from a tax and legal perspective if this is not done correctly.

Whilst not all these common areas may be relevant in all cases, upfront tax planning is important to ensure there are no surprises or unforeseen tax liabilities.

Our approach

We have a flexible fee structure, which can be aligned to the level of our involvement in the project. If the simplification exercise concerns a number of entities, because of economies of scale, the cost of removal of each individual entity is likely to reduce.

We have extensive industry expertise and work closely with our restructuring and tax teams in the UK to ensure a joined-up approach. By working with other Crowe Global teams across 146 countries worldwide, we are also able to provide a global service.

How can Crowe help?

At Crowe, we have a team of experienced and licensed Insolvency Practitioners who can advise you on the best course of action, depending on your business’s circumstances. Please get in touch with either Steven Edwards or Vince Green who are licensed Insolvency Practitioners, or your usual Crowe contact.