Summary

Today we take a deep dive into businesses with multiple trades. Should you keep everything within one business or carve out your trades into a group structure?
We discuss the benefits of a corporate group structure, considerations and food for thought about income generating assets. Enjoy.

 

Hello and welcome to Tax Able, today we are taking a deep dive into businesses with multiple income streams. Specifically, we are going to look at whether you should keep everything within one business or split the streams into a group structure.

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When you start a business you may have one product line or service in mind. But as time goes on your business expands and you may find yourself offering a number of different products or services. For example, this week I interviewed my local spinning studio and they offer the following services:

  1. Spinning class subscriptions
  2. Coffee and snacks
  3. Plants for sale
  4. Spinning shoes
  5. Now venturing into an online store for furniture

When you are offering multiple items you have two options:

  1. Keep everything in one business
  2. Split the services into a group structure – specifically a company group structure

The typical group structure will have one company at the top – we call this the parent. You have shares in the parent company. The parent company then has lots of subsidiaries and each subsidiary will have a different trade within it.

Why would you want to do this?

  1. Allows a new venture to build its own brand and reputation away from the other trades
  2. Reporting – if everything is recorded in one business it may be hard to pull reports to show exactly how one trade is performing
  3. Provide incentives for staff who specifically work on one of the trades as you can directly see how staff are performing.
  4. Easier to raise investment for one specific trade. If you have everything in one business can you guarantee investors you will not use their investment for your other trades. Don’t forget to consider investor tax reliefs for certain trades – listen to last weeks episode “Deep dive into tax reliefs for investors”.
  5.  If one trade is performing well you may look to sell it in the future. It is far easier to sell the trade if it is in its own company
  6. Protection – The greatest risk any organization faces is the risk of insolvency. A group company structure ensures that the parent company is not obliged to pay for any subsidiary liability provided it has not given any corporate guarantees. The parent company protects the assets of the entire group.

Subdivided into:

  • Protect your trades – if one trade is not performing well or if something goes wrong and a claim is raised if you have a group structure the claim would be against that one company/trade and the rest of your business is protected and you can continue without worry.
  • Cash safeguarding – if you have a group structure you can transfer the excess cash from the subsidiaries to the parent. You can choose to use the cash for investment or transfer it into your own hands. Remember there will be tax to pay if you transfer it to yourself make sure you listen to “Its my money, I’ll spend if I want to”.
  • Asset safeguarding – keep property and large value assets in the parent away from the subsidiaries, this is useful in the case of a claim
  • Tax benefits – a group structure is essentially looked at as a whole. If one company is generating a loss that loss can be offset against another companies profits.
  • Transfers around the group are relatively easy.
  • Cant get through an episode without talking about VAT. You may have multiple VAT registrations or one group registration. All depends on the VAT status of the trades. Something to be aware of and to discuss with your adviser.

Things to consider before you implement your group structure

  1. More admin and compliance consideration as you will have a number of companies which require accounts, tax returns and annual forms – confirmation statements. Accountants fees will be higher.
  2. Multiple software subscriptions.
  3. It is best to get the group structure in place at the beginning as if you do want to carve up the trades and create a group it is doable but it will cost you money in professional fees. This is because we have to submit clearances and applications to HMRC as you will be performing something called a de-merger. Future planning is KEY.
  4. QIPS – usually you pay corporation tax 9 months and 1 day after the year end but when you have a group structure you may potentially fall into QIPS. This just means a company may have to pre pay its liabilities up front in quarterly stages. The only impact is cash flow and accrued interest if you miss a payment.

Something else you may not have thought of:
Hold income producing asses outside the group in your own hands. For example, property which the businesses operates from. If the property is in your hands or your pension fund it allows you as the shareholder i.e. owner of the group to extract income from the group by charging rent. This is tax efficient for you and the business. Plus it safeguards the asset and can help build your retirement fund.

Lots to think about today but the points to take away are:
1. Future planning is key so think about how your business will grow and expand in the future and get your structure right from the beginning
2. Group structures provide protection and safeguard assets
3. Group structures allow new ventures to build their own brands and can be utilised to incentive staff
4. Consider the increased costs of compliance as each company will have its own annual reporting requirements
5. Can you hold certain assets outside the group and have you considered starting a pension fund.

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