Small business and tax blog

This post follows on from an earlier post about the difference in the UK between a company, a business, and trading name. It will compare the option of combining all businesses into one limited company, with having a separate company for each business.

There is no legal limit on the number of limited companies you can have.

It is always best to get professional advice specific to your individual circumstances, but the main issues to consider are as follows.

Administration

As each company is a separate legal person, each company would need its own bank account, accounting records, legal agreements and payroll. If one company supplies goods or services to one of the others, there should be an invoice and payment between the 2 companies. If one company pays for something on behalf of the other, this needs to be recorded in the accounting records of both companies, and the 2 sets of records should always agree to each other. If the companies share a common service, there will need to be some form of apportionment or recharge between them.

Accounting costs

A company is normally only required to prepare one set of accounts every year, which would combine all the businesses that it runs. There is therefore clearly a saving in accountancy costs in only having one company.

However, a company that is running more than one business may choose to keep separate accounting records for each business, for its own internal purposes. For example, it may want to see how each separate business is performing at regular intervals. Keeping records such as this would increase the accounting cost such that the difference in costs between one company or many companies may not be that great.

Although generally a company running more than one business only needs to prepare a single set of accounts, the tax office may require more detailed information in some circumstances. For example, where a loss from one business is being carried forward to offset against future profits from the same business.

Audit requirement

An audit is a detailed review of a company’s records and accounts by a registered auditor, which can make the annual accounts considerably more expensive and time consuming than an un-audited set of annual accounts. One of the conditions that would oblige a company to have an audit is where its annual turnover is over £5.6 million, so it may be possible to avoid an audit by dividing businesses over more than one company.

Limited liability

One of the advantages of a limited company is the limited liability. This means that should the company run into difficulties and incur large debts, with a few exceptions the owners of the company cannot be held personally liable for those debts. Where a single company owns several businesses, some of that benefit is lost, as the assets of any of the businesses may have to be used to meet the debts of any of the others.

VAT

A company or a sole trader is normally required to register for VAT when their turnover over the last 12 months exceeds the registration limit, which is currently £67,000. VAT is generally only a cost to a business if it is selling to members of the public, or to other businesses which are not VAT registered, as these customers will be unable to reclaim any VAT that they are charged.

Where 2 genuinely separate businesses are being run, one of which is selling to the general public and has turnover below the registration limit, then having a separate company for that business enables it to avoid having to charge VAT as part of a group of businesses in one larger company.

Note that there are provisions to stop a single business being artificially divided over 2 companies in order to avoid VAT registration.

Tax relief for losses

If a company runs more than one business, and it makes a loss on one of its businesses, it may gain prompt tax relief on that loss by offsetting it against the profits of any of the other businesses.

Where the businesses are owned by separate companies, such prompt tax relief is only possible if there is a parent/subsidiary relationship (that is, one company owns most of the shares of one of the other companies), and this brings with it additional accounting costs and complications.

Without such a relationship, the tax loss gets carried forward to deduct against future profits from the same business. If the business never makes a profit, the benefit of the tax loss is never received.

Impression of size

A single company that combines more than one business is likely to appear to be a larger company from the accounts that it publishes at Companies House. This may give the company a better credit rating, and it may give a more favourable impression to potential customers.

Selling one of the businesses

If one of the businesses is to be sold, this can be achieved more easily, and with more flexibility over the nature of the transaction, if that business is in its own, separate company.