Holding Company?

Hi

I am not entirely sure this is the correct group to be posting in, apologies if not.

I need to know whether or not a holding company is necessary in the following scenario;

Company A has been trading 10+ years and turned over £2.7m in the last financial year.  The directors/shareholders have decided to open up another store about 10 miles away, and anticipate to be doing business to a similar size within the next 2-3 years.  They wish to set up this new store as Company B, and then also set up holding company (Company H) which will then own Company A & B.  Is this the best approach, if so, why?  What are the advantages/disadvantages? Or is it simply a requirement by law?

Would not be easier to just have Company A & B separate?

Thank you in advance for any repsonses.

DN

Comments
Old Greying Accountant's picture

I would imagine

Old Greying Acc... | | Permalink

Having a group structure means costs (and tax losses) can be spread around the group more easily, especially in the early years.

Also, profits can be channelled up the group to be "pooled" in the holding company to invest in further stores in the future.

Administrative costs will probably be handled by the holding company which may just use a single PAYE scheme and recharge the relevant store with its wages cost and share of overhead.. VAT group registration is also easier, so the group has a single VAT number and a single return to make.

This is not an exhaustive list, just a few points that sprung to mind over coffee!

Thank you for your prompt

Norts1985 | | Permalink

Thank you for your prompt response.

Sorry to be naive, but, the holding company pays the CT as opposed to the separate companies paying their own CT then? And same with VAT & PAYE?

I assumed that the 2 subsidaries produced their own accounts at year end, and then consolidated accounts were produced based on the 2 subsidaries?

 

Old Greying Accountant's picture

No ...

Old Greying Acc... | | Permalink

... each company pays their own CT, but if one makes a loss it can be transferred to another company in the group. There are supplementary pages to complete in the CT600 for the claiming company and the surrendering company. Bearing in mind the CT thresholds are divided by the number of trading companies under common control, then you may be able to use a loss in one to bring the profit in another out of marginal rates of CT.

If a group VAT registration is applied for there is one VAT number, one VAT Return and a single payment for all the companies included on that registration, and more importantly, no VAT need be charged on inter-company transactions, which leads on to PAYE ...

... If the PAYE scheme is in the name of the holding company it can re-charge the wage costs to the relevant subsidiary (without VAT). With a decent payroll system this is easy to do (I use and recommend EARNIE). With the cost centre option you can even split employees between companies if they are seconded to a different shop to their normal one, or as likely with management, work at all shops.

Any administrative costs can be apportioned and re-charged to the subsidiaries too, again, without VAT needing to be charged if under group registration.

If you do not have group VAT registration, then VAT must be charged on inter company trading.

 

Why extra companies

Huw Williams | | Permalink

You do not say why the owners are thinking of going down this route and it would be worth considering whether it is the right way to go or not.  All the tax advantages that have been suggested by setting up a group (H and A and B) are available by simply setting up the new business within the existing company!  Probably the only structure that would not be as good is having two separate companies.

There are lots of reasons for setting up groups (or trading through one company) which are related to taxation issues - issues about ownership (if different oweners are going to have different shares in the two businesses) - future intentions (building up a business for sale or building it up to keep) - finance (getting the bank on board if borrowings are needed and securing the existing company if if goes wrong)........

 

Old Greying Accountant's picture

Most importantly ...

Old Greying Acc... | | Permalink

... a small group protects each shop from failure of another.

Say one was burnt down in riots and under insured, if all in one company it could bring the whole chain down with it.

Also, as you say Huw, a separate company gives the chance to reward management of a store with shares (even if non-voting) so dividends can be linked to a stores performance more easily, rather than to group performance.

A need for a holding company?

Norts1985 | | Permalink

Thank you all for your repsonses.

Is there a legal requirement for a holding company? I mean, could Company A and B just be owned by the shareholders rather than a holding company? 

Apart from potentially offsetting losses in the new company against profits in the existing company in the first year, is there any other glaringly obvious advantages to doing so?

 

Old Greying Accountant's picture

No, yes,

Old Greying Acc... | | Permalink

see above

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Group: The company secretary
A space for practitioners to contribute and ask questions relating to company secretaries, particularly with reference to the new Companies Act 2006.