It is not uncommon for businesses to be organised via a group structure, where a parent company holds a controlling interest in subsidiary companies. Structures will vary and come with their advantages and disadvantages.
Group company structures are found across all industry sectors but are perhaps more common in the real estate and financial services sectors. A structure might see the parent company owning subsidiaries outright or operating as a management company controlling the operations of its subsidiaries.
They offer the ability to pool resources, centralise management and spread risk, and can have some attractive tax advantages. But group structures will incur additional reporting and administrative requirements.
Group structures typically fall into three broad categories – the holding company structure, a management structure and the joint venture structure.
Holding companies are more common and will see the parent owning the shares of its subsidiaries. Management companies typically do not hold shares in subsidiaries although they still provide management and financial support. Joint ventures, as the name suggests, are when two organisations form a new legal entity, perhaps to provide a specific service or deliver a new product.
There are many advantages to adopting a group company structure. These include:
- Centralised management, with all or most decision-making resting with the parent company. It can create greater financial and operational efficiency.
- Reduced risk. Risk is shared amongst companies in the group structure rather than resting in just one business.
- Reduced liability. Parent companies are generally not liable for the debt of its subsidiaries, meaning that if a subsidiary collapses, the parent company will be unaffected.
Advantages do need to be weighed against the disadvantages of a group structure. Business owners should consider:
- Raising funds. External investors may be reluctant to invest in a subsidiary company with complex ownership structures.
- Decision making. Decision making can be more complex and slower, with decisions made by the parent company needing to be approved by its subsidiaries.
- It is not uncommon for conflicts to arise between the management teams of subsidiaries and the parent company, particularly when a subsidiary wishes to explore new opportunities, or the parent company adopts a course of action that puts its interests above those of its subsidiaries.
- Complicated finances. Group structures can quickly complicate finances which can become opaque. There will be increased accountancy costs.
Whilst each business within a group structure will be required to pay corporation tax, VAT and other relevant taxes, a group structure can offer attractive tax advantages. These include:
- The ability to transfer assets between companies in a group structure without triggering a disposal charged against Corporation Tax on any gains.
- Groups can account for Corporation Tax through one company in the group through the ‘group payment arrangement’.
- Companies in a group can account for VAT at a group level, with supplies between group companies exempt and with just one entity paying VAT on behalf of the group.
- Losses of group companies can be surrendered to profit-making group companies, potentially reducing Corporation Tax.
Business owners should take expert advice before creating a group company structure to ensure the right and most tax-efficient approach is adopted.