Corporate simplification: why it pays to be pro-active
Thursday December 5, 2019
The benefits of corporate simplification
Corporate Simplification is the identification and removal of surplus entities from a group structure to reduce costs, complexity and risk.
Companies often use corporate simplification as a reactive measure, often reviewing and removing surplus or dormant entities following a large corporate transaction or tax planning. However, corporate simplification can be implemented proactively to create transparent, cost efficient group structures with large, quantifiable benefits.
It is estimated that the average annual running cost of a dormant entity is between £1,500 and £8,000.
Recent research conducted by FRP Advisory using a unique internal profiling application, Falcon, has shown in excess of 100,000 UK dormant entities are registered at Companies House, which presumably add little value or purpose to stakeholders. As it is estimated that the average annual running cost of a dormant entity is between £1,500 and £8,000, dormant entities are carrying a combined unnecessary cost of up to £800m each year.
This staggering figure reveals the scale of inefficiencies incurred by companies across the UK, and the solution could be straightforward.
Key drivers of simplifying
Cost and Resource Reduction
When an entity ceases to trade, it is still required to maintain several statutory obligations at Companies House. These include the filing of dormant accounts and confirmation statements, as well as keeping up to date record available for public inspection and reporting any changes to registered company details. Significant resource is invested in meeting these requirements, both internally and external, with little or no return on this investment. Eliminating these entities could reduce these ongoing costs and drains on resource.
Legacy Risk Management
Numerous acquisitions and staff turnover can often result in company directors responsible for entities they have no historical knowledge, unaware of what skeletons could be hiding in their closet which they are now be liable for. Liquidating is a risk adverse and simple process to wind up entities such as this. As well as allowing for the timely tax efficient distribution of capital, this process also ensures that any concealed legacy risk issues can be mitigated.
Governance and Control
When a company is being packaged for sale, a more transparent group structure will enhance its appeal. Unnecessary entities and convoluted group structures can be off putting for buyers, adding layers of due diligence at times when an accelerated turnaround may be required. A clear, simple structure at the outset is likely to be far more attractive for prospective buyers. A company post-acquisition can also benefit from simplification to eliminate duplicate or surplus entities and ensure the newly appointed directors have a transparent view at the outset.
Why it pays to be proactive
A proactive approach is often overlooked in light of internal resource constraints and more pressing firefighting issues, but it does pay to be proactive. These resource constraints could indeed be alleviated through simplification measures, reducing the administrative burden caused by these dormant or unnecessary entities, freeing up this time and resource to perform more profitable tasks.
The value of keeping such entities could be outweighed by the cost and resource savings available.