A leading engineering company who designs and manufactures specialised equipment to the pharmaceutical and food industries has, and continues, to trade exceptionally profitably and as a consequence had built up significant value in the business.
In common with many successful privately owned businesses, shareholders have invested considerable time and personal finance into the company because they view this as their retirement pot rather than a traditional pension scheme. As a consequence, the company owns its trading premises and has generated valuable intellectual property (“IP”).
As an owner managed company, the director/shareholders were acutely aware that the value and assets that they have accumulated could be threatened in the event of litigious claims or a downturn in business as a result of perhaps an increase in market competition or through the reverse engineering of their products. Consequently, they wanted to develop a strategy to mitigate their risk and protect the key assets in the business.
The solution – Group reconstruction
We discussed with the owners their key concerns and ultimate objectives and with this created a bespoke tax efficient solution to protect the key assets, including their factory, intellectual property, patent rights and surplus profits as far as possible from the trading aspects of the business.
A change of structure
As part of the proposed new structure, a new holding company has been created to sit above the trading entity, whereby the key assets have been transferred to this entity to safeguard and protect their value for the shareholders.
UK tax legislation allows a reconstruction without triggering tax charges under income tax, capital gains tax and stamp duty where there is a genuine commercial reason for doing so and it is possible to confirm this specifically with HMRC.
The revised structure is flexible, allowing surplus trading profits to be transferred to the holding company tax free whilst also allowing assets to be transferred around the group without triggering any tax charges. As the original trading company would stay in its current form, the supplier and customer relationships remain unaffected.
The new structure enables separate subsidiaries to be incorporated if new opportunities arise, enabling separate monitoring of performance and the prospect of claiming enhanced tax reliefs if any subsidiary operation was to be sold off in future. By having different or new businesses streams in separate entities also provides protection in the event a subsidiary company fails, as the key commercial assets are held independently. Furthermore, any losses arising can be group relieved in the current year to any other group entity.
This group reconstruction/reorganisation has made the structure flexible and tax efficient as well as enabling profits to be accumulated for distribution from the holding company.
The group reconstruction has created a protective and flexible structure enabling valuable assets to be ring fenced whilst allowing the existing business to continue in the same manner without incurring onerous tax charges.
Menzies Manufacturing sector advice services
We advise a diverse range of manufacturers, as well as a number of sector-dependent clients. We work closely to find solutions to industry issues, utilising our expertise in everything from business strategy and corporate finance, to audit and tax advice.
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