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Group Accounts and Parent Company

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Hi All, I've rarely dealt with group accounting and restructuring etc so any help is appreciated, or some guidance in the right direction.

I have a client who is looking to go under a bit of a restructure after only 8 months of being incorporated.

Current situation is that Company A has shares of 200 split 151 and 49. Majority shareholder wishes to set up a group structure due to the immenent set up of a new Ltd Co (Company B) and purchase of a pub/resturant, and possibly another in the near future depending on success.

From what I gather, majority shareholder of A wants to set up a parent company (Company C) to own the freehold pub, (a ring-fencing strategy?), and also have their 151 shares in Company A, in exchange for shares in the parent and therefore be the 100% shareholder of  C.  B would be 100% owned by C when incorporated, and similar for future companies if they go through with it. A & B companies would have turnover of less than £500k per year. As would any further companies. 

I need a few things confirming/explaining if possible;

How would the majority shareholder take dividends? Would Company, A & B pay dividends to C? and then C pays to Shareholder?

Would said dividends paid to C be free of tax charges? All the tax would be paid by the shareholder as with normal dividends?

What would be the best way to deal with the pub in C? It would be in FA and the other side would be the mortgage in long term creditors, but then should C charge B rent? Or should C have no trading activity and keep it as payments of dividends only? Could capital allowances be claimed and could that offset against A & B CT Charge?

How would the 151 shares in A be transferred to C? Via Share Exchange? and would there be a stamp duty liability? or can this be avoided?

Sorry for all the questions, but any help is appreciated.

 

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By paul.benny
20th Aug 2019 08:54

First of all, get clear about the client's objectives: what are they trying to achieve by means of this? It seems to be some diy planning that may be tax-inefficient or not achieve the desired objectives.

It's common in hospitality to have each branch (pub in your case) in a separate entity, thereby shielding the rest of the group from failure of one branch. It also looks like your client is going one step further by having ownership of the pub in one entity and operation of it in another, putting two firebreaks in.

That said, all of this seems to be well beyond your skills and experience. Perhaps it's time for your client to find a new accountant.

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Replying to paul.benny:
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By Nicklimb24
20th Aug 2019 10:08

paul.benny wrote:

First of all, get clear about the client's objectives: what are they trying to achieve by means of this? It seems to be some diy planning that may be tax-inefficient or not achieve the desired objectives.

Goal is to trade for a number of years, get established and create a strong brand, and sell group as a whole.

paul.benny wrote:

That said, all of this seems to be well beyond your skills and experience. Perhaps it's time for your client to find a new accountant.

Yes, you are probably right. However shying away from this doesn't help my development. We all start somewhere.

I suppose the pitfalls of running each branch as a standalone Ltd co would be risk of assets should the company fail. But in terms of tax savings I cant see how the group structure would benefit the client?

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Replying to Nicklimb24:
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By paul.benny
20th Aug 2019 10:42

Agree that the group structure doesn't obviously lead to any tax savings - it's more about ring-fencing individual sites.

We tend to think of transfer pricing as a concern of multi, but the rules apply even with domestic groups. The occupier should pay a market rent to the owner and ideally have a formal lease. Don't forget VAT on the rent.

Take care with fit-out costs and any f&f included in the purchase price. Pub fit outs can be big money and you want to be sure that as much possible qualifies for capital allowances.

Think about where the 'head office' admin costs sit. It may be appropriate to make management charges down to the trading companies.

Stamp duty: Depends on the value of the shares changing hands. Reconstruction relief may apply - check on gov.uk as a first step.

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Replying to paul.benny:
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By Nicklimb24
20th Aug 2019 11:43

Thank you. Very helpful.

I suppose VAT on rent would only apply of the pub is opted to tax? The brewery are selling it without VAT so I don't see the point in opting to tax it.

As for the accounts for the parent, I suppose the best way would be to keep trading to a minimum, and only have rental income to cover the mortgage repayments? I am under the understanding that dividends from a subsidiary to a parent are exempt from CT, is this correct?

Value of shares, I would imagine are face value of £1, the trading company hasn't done much trading in the last 8 months, will pick up from next month.

Would HMRC need a clearance letter to approve the restructure?

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Replying to Nicklimb24:
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By paul.benny
20th Aug 2019 14:03

Nick Limb wrote:
I suppose VAT on rent would only apply of the pub is opted to tax? The brewery are selling it without VAT so I don't see the point in opting to tax it.

You’re probably right but I’d read VAT742 before making a decision.

Nick Limb wrote:
As for the accounts for the parent, I suppose the best way would be to keep trading to a minimum, and only have rental income to cover the mortgage repayments?

I wouldn’t have any properties in the parent. A company with a property and associated loan can be cut adrift and the lender does not have automatic recourse to other group assets. If it’s in the parent, the lender could go after the subsids.

Nick Limb wrote:
Would HMRC need a clearance letter to approve the restructure?

I doubt it
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