Richard Coombs, tax partner at Bates Weston looks at selling part of a business and considers whether a business separation demerger is the answer.
Sector consolidation – nurseries, residential care, pharmacies and dentists
In any business cycle, certain sectors go through phases of consolidation, where large operators buy up smaller businesses to try to benefit from economies of scale. At the moment we are seeing consolidation happening in children’s nurseries, residential care businesses and medical related practices such as pharmacies and dentists.
These types of businesses often have more than one business operating from the same company – especially pharmacies and dentists. Alternatively, there may only be one business, but the company also owns the premises from which the company trades – often the case for day nurseries and care homes.
When these types of companies are offered for sale, very often the prospective buyer does not want to buy everything lock, stock and barrel. They may just want one pharmacy, or they want the care home business but do not wish to own the bricks and mortar from which it operates.
Preparing your business for sale
This presents a problem for the prospective seller. How do you split your company so that you strip out what the buyer doesn’t want without triggering a large tax charge? Simply transferring the business to a new company will likely trigger corporation tax on the market value of the business and may also give rise to unexpected income tax liabilities on the shareholder.
Business separation demerger
Fortunately, there is a solution. A business separation demerger will allow you to split your company often with little or no tax charges, depending on the exact circumstances.
There are a variety of methods to perform a demerger and the skill of the adviser is to design a structure that will achieve:
- the overall commercial objective
- create as little business interruption as possible
- minimise any tax liability and
- be fully compliant with HMRC legislation and company law
This latter point becomes especially important just prior to a sale, as any decent tax and legal due diligence team from the buyer’s side will want to crawl all over the transaction to ensure it has been done properly and does not trigger a potential liability further down the road. One sniff of a potential issue could put the whole deal in jeopardy, making the correct advice at the outset vital.
Separating company activities and HMRC clearance
Business separation is a complex area and one where careful attention to detail is needed alongside a deep understanding of the tax legislation.
A business separation demerger is not aggressive tax planning and is considered a normal route to take by HMRC. Most importantly HMRC can be approached to obtain what is termed a “clearance” which confirms that they will not impose anti-avoidance legislation on the transaction(s) as they accept the commercial rationale for the demerger.
Importantly HMRC are not saying the tax relieving provisions will definitely apply. Whether they apply or not depends on the legal documentation and careful implementation. The quality of the clearance is key. The facts, steps, and commercial reasons must be accurately described and if the transaction(s) change(s) in a material way before implementation then HMRC clearance should be refreshed.
A typical clearance application should include:
a) an initial summary of the clearances being requested
b) details of the companies, their activities and tax references
c) the current group structure
d) the shareholders of the parent company and their tax references
e) details of the share classes, percentage ownership and the capital income and voting rights attaching to the share classes
f) details of the proposed transactions and commercial rationale
g) the detailed steps
h) the post transaction structure; and
i) a closing paragraph confirming the clearances being requested
Advice on your business separation demerger
The tax team at Bates Weston have successfully implemented numerous business separation demergers. If you would like to discuss whether a business separation demerger is right for you given your own circumstances, please contact Craig Simpson or Richard Coombs.
This guidance is generic in nature and does not constitute advice. You should take no action based upon it without consulting ourselves or your own professional advisor.
The Dos and Don’ts of Demergers | Bates Weston
Delving into Demergers | Bates Weston