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.
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.
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.
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?