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Holding company management charges or dividends

Why would a holding company charge management charges rather than receive dividends

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Hi all,

Hope you can help

Client wants to set up a holding company for his trading company, transfer all profits from trading company to holding company and then invest them through the holding company. Pretty common.

I have experience with this but for every client I have that does this they transfer the money from the trading company to the holding company as dividends (all the client I have that do this have profitable trading companies and lots of reserves to pay dividends from - this client is the same).

The clients wants the holding company to charge the trading company monthly management fees to wipe out the profits in the trading company and pay Corp tax through the holding. He claims this is what all of his competitors do and has given me an example.

What am I missing? The net Corp tax position will be exactly the same. It is going to be more complicated because the holding will need to register for VAT or set-up a VAT Group and when Corp tax changes in 2023 it may become more complicated still.

Is there an advantage to using manageement fees rather than simply paying dividends?

The client will be the only shareholder of the holding company and the holding company will be the only shareholder of the trading company. The client will be the only director of both companies. 

My apologies if this is a basic question - if it is then please feel free to slate me :) I can take it!

Thank you for any help or advice you can give - it is always gratefully appreciated. 

Replies (23)

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By SXGuy
25th Nov 2021 10:01

unless ive missed something, i admit this kind of set up is beyond my remit, surely the difference is the shareholder wont be paying dividend tax on the transfer?

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Replying to SXGuy:
By johngroganjga
25th Nov 2021 11:14

The shareholder is a company, so would be paying corporation tax on the dividends if they were taxable. But if both companies are UK resident the dividends won’t be taxable.

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Replying to johngroganjga:
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By SXGuy
25th Nov 2021 14:30

Thank you.

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By David Ex
25th Nov 2021 10:18

Archie-Bald wrote:

The clients wants the holding company to charge the trading company monthly management fees to wipe out the profits in the trading company and

Is there a W&E issue? The charge doesn’t seem to have any commercial purpose if it is solely the negative of any profit.

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By JCresswellTax
25th Nov 2021 10:35

A holding company that receives trading income in the form of mangement charges is no longer a holding company, so this whole thing is pointless...

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Replying to JCresswellTax:
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By Tax Dragon
25th Nov 2021 10:53

If you can't see a tax benefit, I guess the only reasons to do it must be bona fide commercial ones. Getting clearance will be a doddle!

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Replying to JCresswellTax:
By johngroganjga
25th Nov 2021 11:16

What definition of “holding company” are you assuming here? Mine is a company that has one or more subsidiaries.

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By paul.benny
25th Nov 2021 11:16

Irrespective of management charge vs dividend, what is Client hoping to achieve by this structure? The holdco appears to be completely pointless.

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Replying to paul.benny:
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By AndyC555
25th Nov 2021 11:25

"The holdco appears to be completely pointless."

Separation of risk. A trading subsidiary is at risk of trading mishaps, lawsuits, something unexpected. If it has large cash reserves/IP/property/valuable assets then those are at risk as well. If the holdco owns them they are not at risk of something which affects the trading subsidiary.

That's the entire rationale of a holdco.

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Replying to AndyC555:
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By paul.benny
25th Nov 2021 11:55

I was referring to the rationale of this particular holdco where there is (apparently) a single trading company below it. The OP doesn't mention transfer of any assets out from the trading company.

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Replying to paul.benny:
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By Tax is always taxing
25th Nov 2021 13:04

Are the profits being transferred not an asset? The profits are being used for other investments which then puts them in Holdco rather than in subco.

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Replying to AndyC555:
Melchett
By thestudyman
25th Nov 2021 21:39

An alternative is for the director to hold these valuable assets or IP on a personal basis and charge a license fee to the company for the right to use it.

Depends on a number of factors. It is really a silly trend these days of very very small companies being obsessed with holding companies, or offshore companies. Just because it might look "trendy"

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By Archie-Bald
25th Nov 2021 12:05

Hi everyone - thank you for the replies, glad to read that I'm not going mad and there is no blindingly obvious reason for using management fees over dividends.

One follow up question I did have - would using management fees instead of dividends have any bearing on the inheritance tax treatment of the "holding company" shares i.e. client dies and leaves shares in holding company to children - if the "holding company" is trading rather than just receiving dividend income would it have any impact on IHT.

I do not offer IHT advice - passed my exams in IHT but that was 15+ years ago, so if it did have an impact I would be sure to engage a specialist to advise on this element of the question - it is just the final issue I could think of.

Thank you again for taking the time to read and offer your opinions, really appreciate it.

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Replying to Archie-Bald:
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By David Ex
25th Nov 2021 12:38

Archie-Bald wrote:

One follow up question I did have - would using management fees instead of dividends have any bearing on the inheritance tax treatment of the "holding company" shares i.e. client dies and leaves shares in holding company to children - if the "holding company" is trading ….

Big “if”. Am I missing the point? (Happens quite often.). What trade is the holding company carrying on?

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Replying to David Ex:
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By Dib
25th Nov 2021 12:56

The provision of management services apparently!

The trouble is that if it is not doing anything for the money there is the possibility that the cost to the sub would not be an allowable deduction as it is getting nothing for the payment.

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Replying to Dib:
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By David Ex
25th Nov 2021 16:48

Dib wrote:

The trouble is that if it is not doing anything for the money there is the possibility that the cost to the sub would not be an allowable deduction as it is getting nothing for the payment.

More than a possibility surely. Service: “Management”; Fee: All your profit. Doesn’t look vaguely W&E for the purpose of subsidiary’s trade.

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Replying to Archie-Bald:
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By AndyC555
25th Nov 2021 13:29

"if the "holding company" is trading rather than just receiving dividend income would it have any impact on IHT."

No, because for IHT purposes you would look at the group (HoldCo + TradeCo) as a single entity anyway.

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Replying to AndyC555:
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By Tax Dragon
25th Nov 2021 13:56

AndyC555 wrote:

for IHT purposes you would look at the group (HoldCo + TradeCo) as a single entity anyway.

That's one heck of a simplification.

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By VATs-enough
25th Nov 2021 17:11

Just to add an indirect tax into the mix

Holdco charging management charges to subco allows for VAT registration and input tax recovery on (some) costs that may otherwise be lost to the Holdco.

Must be a clear rationale for the charge, and a strong management agreement is essential or the VAT recovery could be challenged. Although in my experience, most VAT officers have no clue. They see VAT being charged from 'one to other' and just assume taxable supply, VAT recovery okay.

I think advisors police this area far more effectively than HMRC

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By CJS88
25th Nov 2021 17:19

Management charges - properly agreed, defined, and calculated - make sense in an international group. Otherwise just inviting a challenge as to deductibility.

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ALISK
By atleastisoundknowledgable...
25th Nov 2021 23:33

Does the subsid have historic losses, or some other reason it can’t pay dividends? Mgmt charge to holdco that then can pay dividends to the shareholder(s)?

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Replying to atleastisoundknowledgable...:
Flag of the Soviet Union
By thevaliant
30th Nov 2021 11:43

That would be the only (legitimate) reason I could think of likewise.

(Fun story - ten years ago, a group bought a company with vast historic taxable losses - in year 1 the new sub was ordered to make a huge management charge to its parent! - we warned. Client shrugged and said HMRC are incompetent and won't investigate. Client was right......)

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By tonyshaloms
30th Nov 2021 10:15

If Holdco have expenses, they will want to charge it to taxable income (rather than non taxable dividends received) - using mgt charge they get to reduce overall tax liability.

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