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Is there a simple way to split up a Ltd Co? .....

Is there a simple way to split up a Ltd Co? .....

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If two directors are splitting and one is staying in the company and the other is starting a new company, each with take existing contracts with them.

The assets and net cash and contracts will be halved between them.

Is there a simpler way to do this than a full company buy back of shares and then selling assets and goodwill to the leaving director?

Is there a tax scheme for restructuring?

Posted this the other day but I dont think I explained it properly :-)

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By Tonykelly
05th Mar 2013 15:20

depends on the figures

It may be as simple as setting up a new company for the second director.

 

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Replying to pverco:
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By mdoyle
05th Mar 2013 17:25

The second director is setting up a new company (B) and (B) will buy half the assets (A). However, it doesnt stop there, (B) is also getting half the contracts that were awarded to the original company (A) so the original company (A) is effectively selling goodwill to (B) - on which there will be corporation tax payable by (A)...... . 

The first part is relatively straight forward in that (A) buys back the directors shares and he's out of the equation.

It's the next part whereby the new company (B) then comes back to (A) and buys half its plant (again a balancing charge will arise to company A and tax will be due on the disposal of assets) and then starts to trade on half of the contracts that were awarded to (A) so there is a disposal of goodwill by (A). 

I know, it is hard to explain :-) Just wondered if anyone had carried out a transaction like this.

It's not a demerger or a restructure as its the same trade, not the split of two trades.

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By YellowSticky
06th Mar 2013 10:49

 

 

Is there a particular reason why B wants to structure his exit in such a way?

You might want to consider setting up separate subsidiary companies transferring contracts/assets for each director into each company and then going down the route of a demerger? I have seen this in practice and am happy to advice further

A company POOS might be an option as you say and the director at odds might see the benefit of taking out some value at a lower CGT rate instead, perhaps even at 10% which may be attractive?

 

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Replying to HBrule:
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By mdoyle
06th Mar 2013 11:22

Thanks very much for your reply.

The directors want to split the company for geographical reasons only. Half the business is in one part of the country and one director lives there already and the other half of the business is in another part of the country where the other director lives. Each of them just want to be responsible for their area and draw down the respective profits of each rather than share them. There is no other reason. They want to be independent of each other and fortunately the company has 4 contracts that can be split 2 in one area and 2 in another area and the plant required for those contracts can just be split also. So on paper to them splitting the company in half is simple. It's the tax side of it I want to get right, as the tax man will want his share of CT on the disposal of any goodwill and assets. And I'm wondering if there is a more tax efficient way. 

Re Demerger:

I've spoken to our tax insurance company who offer advice, however, they can only answer specific questions and can't suggest a tax efficient means or a tax plan on the split. They did mention demerger, however, the condition of such being that the company is split for two separate trades. Both companies will clearly be carrying on the same trade. Also, as I mentioned above they want to be totally independent of each other and for neither to have shares in each others companies. So the advisor I spoke to ruled out the demerger option and stated that she does not have any guidelines for what we are wanting to do. I suggested to her the 2 step approach of 1) POOS & 2) company A then dispose of assets (plant and goodwill) to the new independent company B, and she agreed with the mechanics of this.

If we were to set up subsidiary companies and transfer the contracts/assets into each company, would be have CT on sale of goodwill at that point also? And would be have two sets of balance charges as transferring the assets to two companies whereas just now we are just transferring to one with half remaining in the existing company? Unless it saves in tax, it sounds like a slighter longer route than the current option, I haven't done that before so apologies if i've got that wrong. Also, the main company (A) the staying director wants to keep this company as this is the one that the contracts have been awarded to.

When I plot it all down on paper, Step 1 with the CGT consequences to the exiting director, applying for clearance on the POOS and Step 2 with the balancing charge on the sale of the assets and the CT on the sale of the goodwill. (I have valued goodwill of the whole company for the POOS and then attempted to value goodwill on the sale of 2 of the contracts to the new company B). It all makes sense and would keep the tax man happy, I just want to make sure I am doing the best for my client and that there is not a more tax efficient method. 

Obviously when i'm calculating the figure for the POOS I need to take into account the fact that company A will have these Step 2 tax charges I have mentioned and reflect it in the price so that company A is not shouldering all the tax on the deal. 

Would another option, to avoid the sale of goodwill to company B in the second step, be to get the contracts awarded direct to company B and not company A therefore there is no transfer of contract or is it obvious that those contracts have been gained due to the original existing company A?

Thank you so much for your time on this matter. I have a habit of making things more complicated than they need to be so it's good to get another perspective on it. 

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Nichola Ross Martin
By Nichola Ross Martin
06th Mar 2013 11:36

A demerger might be good

but there are other options, I advise on a lot of restructuring cases, they are generally all different and I could write a book on the topic so forgive me for not doing that here, I would need to look over the accounts and find more information first. I am happy to help you explore this case in more detail a peer review may assist you in sorting out the wood from the trees and alieviating your concerns. 

Virtual Tax Support for acountants: www.rossmartin.co.uk

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By M Shapland
06th Mar 2013 12:11

splitting up limited company

You may wish to look up guidance on HMRC's website. See Corporation Tax Manual. Link below:

 

CTM17250 - Distributions: demergers: introduction 

 

If there are genuine commercial reasons this can be done quite easily. Recommend applying for clearance of the proposes transactions by making an application to HMRC.

 

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By YellowSticky
06th Mar 2013 12:54

No worries at all. Nichola is quite right - it is practically impossible to think of what might be the best route without actually sitting down and working through various alternatives. No doubt there are plenty of options and a hive-down and demerger may be one of the options to consider. That said, having read your response there are various points which probably need to be clarified as well and the tax implications at each stage, including anti avoidance provisions which may kick-in with any route really.

I would shop around for advice. No doubt Nichola is right up there amongst esteemed tax advisers in town! Equally happy to speak further about it should you want to get in touch! 

 

 

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By mdoyle
06th Mar 2013 14:58

 

 

Thanks everyone. A few people have mentioned a demerger, if I tell you why I didn't start of with this route as follows;-Conditions to be satisfied

To be within the scope of ICTA88/S213, a demerger must satisfy certain conditions. These seek to ensure that:

there is a genuine division of trading activities, and       CAN THIS BE GEOGRAPHICAL ONLY AND NOT DUE TO SPLITTING DIFFERING TRADES? the demerger is not a device for facilitating a partition of trading activity from investment, a change of control of a company, or tax avoidance.        ITS THIS BIT THAT I THINK IS IMPORTANT - THERE WOULD BE A CHANGE IN CONTROL, THE DIRECTORS WANT COMPLETE CONTROL OF THEIR OWN COMPANY. THEY DO NOT WANT TO HAVE SHARES IN EACH OTHERS COMPANIES. THE SHAREHOLDING WILL BE GOING FROM 50/50 IN COMPANY A TO 100% DIRECTOR ONE IN COMPANY A AND 100% DIRECTOR 2 IN HIS NEW COMPANY B.

Does the above not rule out the demerger route? 

 

 

 

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By YellowSticky
06th Mar 2013 17:08

One of the options

You might find guidance from the Revenue manuals useful.

http://www.hmrc.gov.uk/manuals/ctmanual/CTM17250.htm

Again I would stress a demerger is just one of the routes available and is not necessarily the most suitable.

YellowSticky

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By Mica
14th Oct 2013 09:50

Splitting up a LTD company

Hi,

I am considering to split up a company into 2.

We are 2 people working on the same company but we would like to have our own company for full control.

I was considerin keeping one director in the existing company and moving one onto a new company.

I have been reading on the internet and it is still not clear to me if theer could be some issues related to the split, i.e. VAT advantage for flat rate

I was wondering if anyone has goe through a similar process and has any comment/feedback to share?

 

Many thanks

M

 

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