In these difficult times, for most businesses, saving costs is a key focus of management teams. When cost saving measures can be implemented quickly, generate other benefits, and have few if any down sides, the case for pursuing them is surely overwhelming.
Corporate simplification is one such cost saving measure.
What is corporate simplification?
Corporate simplification (“CS”) is the elimination of one or more legal entities from a group structure by striking off or Members’ Voluntary (solvent) Liquidation. Striking off an entity is to apply to have it removed from Register of Companies at Companies House, it then ceases to exist and to own any assets. Members’ Voluntary Liquidation is a process initiated by directors and controlled by shareholders, which leads to the appointment of a liquidator, who will realise all the entity’s assets, deduct agreed costs, pay all outstanding creditors and return the remaining funds to shareholders. Both lead to the entity ceasing to exist.
Why do it?
The most obvious cost savings are the direct related costs of company secretarial, accounting, Directors’ & Officers’ Insurance, and tax for the entities to be eliminated. These have been estimated at some £3,500 plus VAT for each entity in the retail sector, £7,000 in Financial Services and £12,500 in Energy, Infrastructure and Utilities. In addition, the man hours lost in dealing with these entities are likely to far exceed these figures. There are other benefits too.
CS brings greater focus and transparency to a group structure, which will enable lenders to understand the corporate structure more easily and make it easier to raise debt finance. Directors may find that they can bring greater focus to a smaller number of directorships, which is important given the enhanced director duties and responsibilities under the UK Companies Acts and may help to minimise the loss of corporate memory. CS may also generate capital losses (or gains) which may assist in mitigating any tax payable on capital gains and re-allocating capital. It may also simplify inter-company trading and minimise transfer pricing issues.
How do you do it?
The process can be divided into three phases:
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