Creation of parent company which wholly owns subsidiaries

Creation of parent company which wholly owns...

Didn't find your answer?

Just wanted some clarification on this and hoped you guys could do just that.

I have a client who currently owns 3 business; he is 100% shareholder in each. To save paperwork with corporation tax etc., his idea was to form a new parent company which he again would be 100% shareholder. He would sell the shares from the other 3 co's to the parent (or himself to himself) at the cost price of the shares (so no capital gains or anything like). The idea being that all 4 companies will have the same y/e date. When compiling the financial statements, the net profit on each of the 3 companies will be noted and the parent will invoice them for management charges to the value of the net profit thereby making nil profit/loss. This will result in the parent company alone paying the CT (ie on the accumulated profit of the 3 co's); my client himself will only draw his salary from the parent co.

Does this seem like an "allowable" thing to do and are there any other tax implications I may not have thought about?

Any help would be appreciated.

Thanks. Dave

Replies (10)

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By George Attazder
30th Sep 2011 14:15

None of it's ideal

The management charges you're proposing could be challenged by HMRC as not being incurred wholly and exclusively by the payers, which could then lead to tax distortions due to the associated company rules, which I assume is the trigger of the issue, anyway.

The sale for cash may give rise to CGT charges because your chap will be connected with the acquisitor company and so a market value substitution takes place.  There will also be ½% stamp duty on the share puchases.

Doing this by way of a share for share exchange will solve the problems.

You seem to want to get all the tax into one company.  One way of doing this would be to have all three businesses within a single company (as separate trades if necessary).  This can be done either by forming a group in a new parent entity and then transferring the trades over.  Alternatively, one of the existing companies can acquire the trades of the other two in exchange for shares, with similar CGT and SD reliefs available.

The downside of having the three businesses in a single company is that the tree separate trades are no longer protected from each other by having separate limited liability.

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By Peter The Painter
30th Sep 2011 14:23

Where to start

1. First time anyone has suggested that an extra company will save paperwork!

2. Do not "sell" the shares to the parent company (a transaction between conected parties will be at market value not the price charged) exchange the shares for the issue of new shares in the parent company.

3. Do not forget to request HMRC clearance for 2.

4. Do not forget that the issue of shares for consideration other than cash is subject to Stamp Duty.

5. There are now 4 associated companies so the upper limit for the small companies rate of corporation tax wil be lower and all the profits are now in one company, possibly not a good idea.

6. Is there a risk that the management charge might be viewed as not wholly and exclusively for the purpose of the subsidairy company's trade. What is the parent company doing? This can be overcome but it is a good idea to think about it now so that the correct answer is gievn to HMRC should they ask.

There will undoubtedly be VAT and possibly IHT mattters to consider as well but  the coffee machine is calling.   

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By AndersonAccountancy
30th Sep 2011 14:31

Thanks for your replies.

Essentially, the idea was that the owner would simply take his wage called management fees of the 3 smaller co's from the parent company; ie 1 PAYE return and not 3. Just trying to think if this is do-able?????????? help, coffee, brandy anything?????

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Replying to User deleted:
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By User deleted
30th Sep 2011 14:51

Payroll

AndersonAccountancy wrote:

Thanks for your replies.

Essentially, the idea was that the owner would simply take his wage called management fees of the 3 smaller co's from the parent company; ie 1 PAYE return and not 3. Just trying to think if this is do-able?????????? help, coffee, brandy anything?????

Why not use the existing structure and have one of the companies run the payroll for all three? It works perfectly well, but you need to make sure it is set up correctly to minimise VAT problems.

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By User deleted
30th Sep 2011 14:39

I can only echo the points above

But point 5 in the preceding post is particularly relevant. Why on earth would you want to dump all of the profits into one company and potentially waste three small company rate bands?

And, again, how will the creation of a new parent company reduce CT paperwork? The trading subsidiaries will still all need to prepare tax computations and returns - just because in each case their net profits happens to be £nil doesn't make the computations any simpler!

One good reason for setting up the group structure is to allow losses to be shunted around the group (but even then, this - and marginal tax rates - can be dealt with at the moment by way of reasonable management charges, without creating a formal group).

In short, groups have advantages, but it sounds like you want one for all the wrong reasons.

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By AndersonAccountancy
30th Sep 2011 16:22

I seemed to have opened a can of worms here :)

What appeared to be a simple thought has materialised into mountain.

I think all he thought about doing was simply taking his wage from the parent company which would equate to the sum of the net profits of the other 3. He is also thinking of buying other businesses and housing them in the group too.

At the moment, all the companies are below the VAT threshold so not an issue. Although he owns all of them, they have other people working them and he essentially manages them spending time each week at all of them so theoretically, his time as manager is wholly and exclusively for that business.

Another thought occurs, if all the profit is with the parent, then there will be no value in the children if the situation arises that he wanted to sell one of them.

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Replying to Sir Digby Chicken Caesar:
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By User deleted
30th Sep 2011 17:03

Arms and legs

AndersonAccountancy wrote:

At the moment, all the companies are below the VAT threshold so not an issue.

Are you sure that VAT is not an issue? Quite possibly not a problem, but don't overlook disaggregation rules

AndersonAccountancy wrote:

Another thought occurs, if all the profit is with the parent, then there will be no value in the children if the situation arises that he wanted to sell one of them.

Why no value? If the only reason that there is no profit is because it is being wiped out by a management charge, that charge would be taken into account when valuing the company. Though, of course, if the management charge represents a realistic charge for the director's services, the company would have no profit (and little value) in any case.

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By George Attazder
30th Sep 2011 17:17

VAT

Don't forget that the proposed management charges will be potentially VATable and could trigger a need for your intended parent to register in any event (unless you group register, which involves registration of at least one trdaing company).

What exactly is it you're trying to achieve?

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By AndersonAccountancy
30th Sep 2011 17:31

George Attazder wrote:

George Attazder wrote:

What exactly is it you're trying to achieve?

 

Hi George,

What we're trying to achieve is simplicity. The client owns 3 companies at present and is taking a wage from each one. He simply wants to have a "parent" company which will own (albeit in his name) the other 3. And then simply take a wage (and/or dividends) from the parent. The original idea was to invoice the 3 "children" a management fee from the "parent" for the value of any net profit they make and this being used as the wage. The other intention is that by making them a group, he can shift staff around as and when the business dictates. Not really sure how to go about this.

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By User deleted
30th Sep 2011 19:18

What you are trying to achieve

Can all be done without forming a group. A group has other advantages, but if your sole objectives are as above, it isn't necessary.

Caveat - when I say it can be done, refer to the previous warnings that management charges have to be commercially justified, whether or not in the confines of a formal tax group.

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