Beyond Brexit - Time to act: why simplification can be a big accelerator

Glen Babcock Partner, UK regions, PwC United Kingdom Jul 02, 2018

Following our ‘Time to act’ series, Glen Babcock discusses how simplifying your corporate structure can be the dynamic force in helping your company thrive Beyond Brexit.

Glen Babcock

Andrew Gray’s recent blog Beyond Brexit - it’s time to act, discussed the all important ‘no regret’ decisions that businesses can make now to be ready, whatever the outcome of the Brexit negotiations.

Reflecting on my own experience as Corporate Simplification & Exit Leader, I’m having more conversations about the importance of rationalisation. With the numerous considerations of Brexit to understand, simplifying your corporate structure is a ‘quick win’ to help accelerate your business in a post-Brexit world. For me, it forms the foundation of many of the ‘no regret’ decisions that have been discussed in this series and should be a priority on the board agenda. To bring this to life, I’ve recently worked with a listed client, who embarked on an ambitious programme to simplify their legal entity structure by over 90% in only a few years.

Adopting this mindset now, before Brexit, provides the ‘perfect storm’ to reducing costs and reaping future benefits.

Does the business case for simplification stack up?

In most cases, the answer is ‘yes’. Simplification provides many benefits for companies, such as lower compliance costs, better governance, more focused management time, reduced Directors’ risk, improved transparency.  And the list goes on. The benefits are achievable for all groups, not just listed or regulated groups. Furthermore, simplification generally does not significantly impact customers, suppliers or operations so simplifying your structure will truly be a ‘no regret’ decision.

The costs of maintaining a single legal entity includes direct cost, such as audit and tax fees and indirect cost, such as management time, systems support and other overheads. On average, an entity cost (both direct and indirect) is £30,000 per annum. This can be significantly higher for actively trading companies and much less for dormants. That’s a lot of money tied-up in a non-value adding part of the business. Think of it as a rainy day fund to invest in operations.

However, indirect costs particularly often have never been calculated - so, the financial business case for simplification is never quite straightforward. Add in the fact that it is rarely anyone’s day job to eliminate redundant entities, and the simplification exercise never gets off the ground despite the benefits.

Four steps to get started and gain momentum

  1. Engage with the right people from the group, and, if you don’t have prior experience of doing this, bring in external expertise from the beginning. Common obstacles to simplification may include crystallising liabilities, losing IP assets or generating risk. Most are avoidable with proper planning and involving the right people.
  2. Simplification requires that many functions come together to agree to eliminate an entity. At a minimum, the tax, legal, finance and company secretarial functions. Other areas, such as HR and pensions will also need consideration if the entity has ever traded or employed people.
  3. Work out what benefits you want to achieve, set timelines and look at resource requirements. As with many things, you get out what you put in.
  4. Categorise your entities in different buckets, “must keep”, “keep for the time being” and “surplus to requirements”. Then gain momentum by focusing on the quick wins - eliminate those entities that everyone agrees are no longer required.
  5. Measure progress and maintain momentum. These programmes take anywhere from months to years, so proper focus is needed to ensure your goals are achieved.

Why now?

Well, we still have a little time before the UK leaves the EU. We know the environment we are working in. We know what we can and can’t do and how to do it. A large percentage of UK legal entities are dormant, so the opportunity is great. Whilst we are planning different scenarios operationally, we can simplify our corporate structure properly.

One example of Andrew’s recommendation to “take advantage of existing government schemes”, is cross-border mergers. Many multinational companies have looked at using the cross-border merger when undertaking a corporate simplification project, and this is currently allowed as part of the EU Directive. The benefit is that you can reduce (merge) the number of entities rapidly and then liquidate a smaller number of entities.

Beyond Brexit, this option may not be available. With the added complexity of the US tax reform potentially leading to US based multinationals to set up their overseas tax structure in a single jurisdiction, the cross-border merger into the UK may have increased popularity.

Finally, corporate simplification can have a payback period as short as 12 months from implementation.

So why not start today?

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Glen Babcock

Partner, UK regions, PwC United Kingdom

Tel: +44 (0) 7711 153 138

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