Is unknown history or tax noise holding you back from eliminating a surplus company? Demystifying the myths behind entity reduction pre and post-acquisition
October 27, 2016
As mentioned in our previous blog “Decluttering your business; what stops you and should it?” incorporations are running at a faster pace and structures are becoming increasingly complex. Corporate Simplification has become a particular hot topic in the board room, especially where merger and acquisition activity has resulted in a cumbersome, and sometimes seen as embarrassing, group structure chart. So, are you sure there is no harm in holding on to that surplus entity? We demystify some more myths which we commonly encounter.
“This company has a whole lot of history”
Myth: you should not eliminate a company unless you know its full history.
Many clients have concerns over the entities in their group where they have incomplete knowledge of the trading history. This is commonly the case for acquisitive groups where the companies’ ownership has passed through several hands, and the detailed knowledge has been lost.
Groups will often hold companies for many years even though they add no value, and directors are surprised that elimination is a possibility without knowing their full history. Some directors take the view that these companies should be kept in case an issue arises that they were not aware of. However, by delaying the elimination process the directors’ risk can greatly increase, as it prolongs the opportunity for unknown creditors to appear. This is most commonly seen in manufacturing industries where personal injury claims can arise many years down the line.
Often a long and complex history is actually a reason to eliminate such companies. The statutory process of a solvent liquidation is designed to seek out potential unknown creditors so they can be paid in full before the company is eliminated. If implemented correctly, the liquidation process can be used to give the directors / group a greater degree of finality and create a barrier between directors and any future claims. Directors can then rest easy knowing that they have taken the appropriate steps to eliminate a company.
“These entities are just too taxing to deal with right now!”
Myth: all tax matters must be closed out before commencing a liquidation
The existence of outstanding tax noise may seem complex or troublesome when contemplating the elimination of a company, and many directors may be put off as result. Issues such as the receipt of interest on an inter-company receivable, creating the requirement of an annual tax filing or perhaps even membership of a VAT group is quite common in subsidiaries that are otherwise dormant and potentially surplus to requirement.
However, such tax noise can usually be quickly and easily resolved, allowing the elimination of the company to proceed.
In addition, an elimination via the liquidation process incorporates tax clearance from the various HMRC offices, which provides the directors the comfort that the company’s tax affairs have been brought to a close in a complete and appropriate manner.
How many companies in your group or portfolio are surplus to requirements? If the above points relate to you and you would like some further advice then please contact us using the details below.