How Reorganising Your Company Can Make Commercial Sense

In recent years, we have acted on behalf of several companies to review, advise and reorganise their ownership structures. Many companies, particularly those which have been trading for a number of years, have diversified from one or two core activities into other areas. A common scenario is the company which has purchased one or more properties as investments. In such circumstances, a scheme of reconstruction can be used to break up an existing business with varied trading activities into separate undertakings.

Reasons for Company Reorganisations

There are a number of reasons why companies decide to re-organise their activities.

• Disparate business activities
• Substantial investment assets, unrelated to the core activities
• Disputes between shareholders with a desire to part ways
• Inheritance issues
• Protection of key business assets
• Potential sale of part of a business

Pitfalls of Company Reorganisations

As stated, the rationale for some business reorganisations can be a desire to separate the company into distinct business areas in anticipation of the sale of a part of the business to a third party. However, the prospect of accruing significant tax liabilities can often deter such sales. For example, a company may carry on two or more trades however, the shareholders may want to sell only part of the business and retain other elements to develop in the future. In those circumstances, the shareholders are potentially faced with a double tax charge. In the first instance, the company may incur a tax charge in disposing of assets and secondly, the shareholders will be taxed when they seek to extract the sale proceeds from the company.

Minimising Your Tax Liabilities

Under section 110 of the Insolvency Act 1986, a liquidator can transfer assets under his control to another company and receive shares in that company in lieu of consideration for the transfer. A section 110 reorganisation will often involve the creation of a new holding company and possibly the formation of one or more other companies. The result of the reorganisation often leaves the shareholders of the original company with shares, in the respective proportions, in new companies which control distinct assets of the original company. The benefits of the reorganisation mean that a prospective purchaser can then acquire the shares of a new company which owns only the assets or trade which attracted the purchaser in the first instance. HM Revenue & Customs (HMRC) recognise the importance of section 110 reorganisations and will give clearance for various tax reliefs for a proposed reorganisation that is being done for genuine commercial reasons. This means that the reorganisation can often take place with tax liabilities kept to a minimum. However, the entire process from obtaining clearance from HMRC to liquidating the company can be fraught with potential difficulties and requires careful planning.

If you would like to find out more about the reorganisation process or any of our other services and how they can benefit you and your clients, please contact Peter Hogan at Darlington, Nicola Bellerby at Durham or Terry Doyle at York.

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