The client wants to set up a new company to operate this new trade.
Would the advantages outweigh the disadvantages if the new company became a subsidiary of the existing company or would it be more beneficial for the directors to own the shares in the new company?
There is a possibility that the new company could be sold in years to come. If the company is a subsidiary then Substantial Shareholding Exemption could be applied however if the shares were owned personally by directors, Entrepreneurs Relief could be claimed, on the chargeable gains. Which would provide a better outcome?
Are there any other factors that I am overlooking that are pertinant?
Regards
Dave
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Replies (9)
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Very little information provided but things to think about:
1) Relief for losses
2) Dilution of Corporation tax bands
3) VAT - group VAT registration / artificial separation
4) Compliance costs of having an extra company
5) Capital allowances and split of AIA
6) NIC - taking advantage of the employer NIC holiday
Just off the top of my head - there may be other things to consider when you sit down with all the facts. Probably worth speaking to a tax adviser to make sure you get it right.
Best wishes
Great. . .
Didn't consider NIC holiday or limitation of AIA now that it will be reduced to £25k, great points and much appreciated. Apologies for vague information.
Kind Regards
Not Quite
The question concerns setting up a new company as either a subsidiary or separately owned, not creating a branch.
Hence the corporation tax bands will be diluted anyway, the compliance costs will be increased if a group structure is chosen, and the AIA restriction is NOT £25,000 each or £12,500 each - the two companies, whether as a group or as associated can decide which company or companies can claim the £25,000 (don't forget £100,000 until 31 March/5 April) or any part thereof.
Thanks. . .
Operating as a branch is another option I am exploring for the client so knowing the benefits/drawbacks for this will also assist with my report. Didn't know about the AIA being transferable so thanks for that gem of information. Did think it was £25k each but haven't researched this yet. That is unfortunate!
Thanks
AIA. . .
"In the case of singleton companies, each receives its own AIA unless, for example, it and another company are under common control. In cases where companies are under common control (for example, two companies owned by the same individual) each company will still be
entitled to a separate AIA, unless they are engaged in “similar activities” or share the same premises in a financial year."
Acitivities will be different and will operate from different premises thus each company will receive full AIA.
I'd be inclined towards the branch option...
... subject to the amount of plant and machinery investment (eligible for AIA), as it allows any honeymoon losses to be offset without an artificial restriction the lower and upper marginal relief limits. I assume by branch, we're referring to the position of having the two trades in the same company. The two trades can be separated by qualifying demerger for bona fide commercial reasons or by hive down later on if required.
Whether ultimately to have a subsidiary or a separate company is dependent on what might happen to any sale proceeds. If they would be reinvested in the main trade, a subsidiary qualifying for SSE has to be preferred.
If they are to be distributed to the shareholders, then (unless the shareholders will remain basic rate) a standalone is preferred as you get to keep 90% of the proceeds with ER, as opposed to 75% (max) after distributing the SSE qualifying proceeds, at current tax rates.
A couple of further thoughts
What about setting it up as a partnership. If the start up phase is successful the partnership can then incorporate and sell the goodwill to the new company - thus creating an opportunity to extract profits at the 10% CGT rate.
If setting up as a separate limited company and funding is required then (if possible) get the individuals to put all the funding in as share capital. If it all goes wrong they can then claim income tax losses for the lost share capital. If it all goes right then use the simple CA2006 procedures to reduce the share capital and repay the shareholders their original cash.
Interesting...
As the initial replyer stated, I didn't provide very much information and there are other important factors I left out.
The existing company sold part of its business (basically goodwill) and received a substantial amount in proceeds. They are now reinvesting some of these proceeds into another business venture so I'm going towards the branch option so that 'income-style' rollover relief can be claimed.
Also, like Steve Kesby mentioned, the business can be hived down at a later date and SSE claimed, so long as certain conditions are met. Abd this should not affect the small profits rate for corporation tax. And there will be less compliance requirements and costs. And I cleared it with HMRC that Employers NIC holiday should still apply as a new PAYE scheme can be set up for new business as it is entirely or wholly different from main trade. And if losses in first year or two these are easily offset against main trade profits.
Think the branch option is the winner in my scenario.
Cheers for all your input.
Partnership - what about an LLP?
Another viable alternative is the LLP, giving all the protection of a limited company, with the flexibility of income tax liability and, if relevant loss relief. Just a thought.