Group companies – getting it right


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These days, it is very common place for providers in the residential housing market (private companies, housing associations and local authorities), whether delivering market and/or affordable housing, to use corporate group structures with multiple entities. There are a number of sensible and legitimate reasons that multiple subsidiaries can deliver an optimal solution and for some bigger players, using group structures has become second nature and the norm.

To deliver the benefits of development in a group structure effectively, various teams need to be joined up to ensure that the additional administrative hurdles don't become risks and liabilities. This article will pick up some (but by no means all) themes and risk areas, including some common pitfalls that arise as a result of operating a group structure. 

Group structure advantages

Grant availability – often with affordable housing schemes, there will be an entity within the group structure that is registered with the Regulator for Social Housing (RSH) either as a for-profit or not-for-profit registered provider (RP). RP status has the primary benefit of having more readily available access to affordable housing grant. It also comes with significant additional administration in order to satisfy the RSH in relation to the various standards which the RSH administers and  which the entity must report on. 

Tax advantages – with numerous tax advantages that can be used in real estate transactions, through onshore and offshore solutions, this will be a key economic consideration for many group structures. For example, VAT efficient structures for real estate, and particularly affordable housing, to keep certain development activities within a separate vehicle are becoming more common place.  

Ringfence of risk – establishing a project specific vehicle enables the risk associated with that project to be contained within that entity, subject to any security or parent company guarantees that may be given. This also can provide a more straightforward financing position where the intra-group loans are more visible than funding development within a single entity. 

Collaboration – having separate corporate entities enables a corporate joint venture to be formed, which will usually focus the partners on their specified inputs and outputs. A good tried and tested method for partnerships also brings these entities into the partners' groups (although may be subject to separate rules on accounting). 

Some (non-exhaustive) tips to consider

Changing to a group governance mind-set – when setting out on establishing a group structure, an important shift in mind-set is raising awareness throughout the legal, governance and company secretarial teams (if they will be the same teams serving all entities) and developing processes to ensure the right entity and the right officers/directors are; signing documents, holding board meetings, keeping minutes and making resolutions.

Without clear communications and relevant training for staff members, it is easy for mistakes to be made which can have serious consequences, especially in the context of funding/security and landlord and tenants. 

Process change – more broadly than just governance, there may be changes in how things are done in the new group company. These may be because of; 

  • regulatory issues  – for example, local authorities and housing associations having more flexibility on tenancies; 
  • financial – directors may need to consider the financial restraints the group company has as opposed to the parent company when acting for both and whether intra-group finance be required; 
  • public procurement – a subsidiary of a contracting authority may not be subject to public procurement rules; and
  • conflicts – there could be a higher risk of the potential for conflicts of interest given the shared personnel between the group companies. 

Oversight – whatever the governance arrangements and control that is exercised over the group entities, the parent company will need sufficient oversight of the group in order to manage the overall risk effectively. This may be done through delegation, effective communication and reporting. Where subsidiaries are envisaged to be independent of the group, the parent should be cautious and have in place safeguards and advice to ensure that the subsidiary does not create liabilities and risks which the group as a whole cannot withstand (depending on the funding and other arrangements in place). 

Tax, accounting and audit – in establishing subsidiary companies, it is crucial that attention is given to key statutory duties which may require specialist input on a periodic basis and which may require bespoke processes and advice, especially if a subsidiary may have different treatment to its parent. These issues are governed by statute and directors of the companies can take on personal liabilities if these duties are not adequately discharged, for example:

  • What is the tax status of the subsidiary and meeting its HMRC registration obligations and deadlines? Consider VAT grouping, SDLT reliefs, corporation tax liability, charitable status, intra-group transfer pricing, PAYE and NICs (if it employs staff). 
  • How will the accounts of the group be published? Are group accounts required under the Companies Act 2006? Do the accounts need to be published with a different registry (e.g. Companies House, the FCA or Charity Commission)?
  • Does the company require an independent audit of its accounts? There are thresholds in place that may exempt certain companies from audit requirements, and similarly some entities are required to undertak audit due to its regulatory status. 

Resourcing – When establishing a group company, it is important to consider the resourcing of the group company and ensure that it has the human and external resources to discharge its function. 

In addition to the governance function outlined above, it is common place for some personnel to work across the group but this can raise employment considerations as to whether they are able to undertake that work under their existing employment contract.

Depending on the nature of the work that the group company is undertaking it may also need specialist advice or resources which its parent has not needed. For example, a subsidiary which is branching out into a new sector may require additional skills on its board or through consultants. 

Establishing and operating a group structure can be daunting at first, but it is a tried and tested method which with careful planning and implementation need not keep you up at night. Working with group structures in the private, public and third sectors we understand the unique challenges that can arise and have experience in advising on optimum structures to meet the objectives of organisations as well as what to do when things go wrong.

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