In today’s digital age, the role of a digital agency is becoming increasingly important for businesses looking to establish a strong online presence.
However, running a successful digital agency is not an easy task, as it requires a lot of resources, expertise, and knowledge of the latest technologies and trends.
As an agency owner, you will have doubtless faced your fair share of challenges in building your business over the years.
Staff turnover, client projects, and the general unpredictability of the industry can cause sleepless nights.
Despite these challenges, you have a strong attachment to your agency and want to protect and structure it in the best possible way.
One option that some agency owners consider is establishing a holding company.
What is a holding company?
Firstly, a holding company is a type of business entity that owns and controls a group of other companies, known as subsidiaries.
The holding company itself does not usually engage in any operational activities; instead, its primary function is to hold ownership of the subsidiary companies and manage their assets and investments.
The subsidiary companies may operate in a variety of industries or sectors, and they may have their own distinct brands, products, and services.
Why have a holding company?
A common business structure involves a holding company owning 100% of the shares in a trading company, in this case your digital agency, allowing individual shareholders to own their respective stakes in the holding company.
One advantage of this structure is that assets like cash, property, or intellectual property can be held in the holding company and protected from any legal issues faced by the agency.
This shields valuable assets from creditors in the event of any legal disputes.
Another benefit is that dividends can be transferred into the holding company tax-free. In contrast, extracting dividends out of the trading company requires careful planning to ensure tax efficiency.
By transferring dividends into the holding company, shareholders can decide when to invest the cash or vote dividends from the holding company when it is tax efficient to do so.
However, some argue that the tax benefits of this structure can be insignificant, and the administrative requirements, such as annual submissions to HMRC and Companies House, can add up to a needless additional cost.
Whether this structure is worth considering depends on the individual circumstances of your digital agency and seeking professional guidance is always advisable.
Ultimately, what works for one agency may not work for another.
However, by leveraging the benefits of a holding company structure, you could position your digital agency for long-term growth and success.
Do holding companies pay tax?
In some cases, holding companies may also be used for tax planning and management, as the tax liability of the holding company and its subsidiaries can be managed in a more efficient manner.
There is no additional corporation tax exposure to the group.
The income in the holding company will be subject to corporation tax, but the corresponding subsidiary expense will be deducted. This will reduce its corporation tax liability.
Dividends paid from subsidiaries to the holding company are not taxed on the basis that both companies are resident in the UK.
How are owners of holding companies paid?
The owners of a holding company extract surplus cash from the holding company as dividends. This is like the shareholders of any limited company.
Dividends will be taxed if the income exceeds a dividend allowance (which is currently £2,000).
The rate of tax depends upon the income tax band of the shareholder.
- Basic rate Income Tax: 8.75%
- Higher rate Income Tax: 33.75%
- Additional rate Income Tax: 39.35%
Can a holding company purchase other companies?
The holding company sits at the top of a group structure, with any company purchased becoming a subsidiary.
This is one of the key ways that a holding company can grow and expand its portfolio of the digital agency and its subsidiary companies.
When a holding company purchases another company, it becomes the new owner of that company, and the acquired company becomes a subsidiary of the holding company.
The process of purchasing another company is known as an acquisition, and it can be a complex and involved process.
The holding company must typically conduct due diligence on the target company to assess its financial and operational health, as well as its potential synergies with the holding company’s existing operations.
Once the acquisition is complete, the holding company becomes the new owner of the acquired company, and it can integrate the acquired company into its existing operations.
How do I create a holding company?
One avenue you could explore is a share for share exchange which is where a company issue shares to a person in exchange for shares in another company.
These exchanges often occur when forming new holding companies in order to transfer assets out of the original company.
To ensure the transaction is tax neutral and does not result in chargeable gains, such as capital gains tax, income tax, and stamp duty, these exchanges need serious consideration and thought.
What are the tax consequences of a share for share exchange?
A company that exchanges shares with another company will typically be considered an ‘acquiring corporation’ and the other company will be considered a ‘target company.’
For tax purposes, this means that if you own stock in one of these companies and it is exchanged for stock in another company, your new shares will effectively be treated as if you purchased them at the fair market value of all of the assets and liabilities of the target company.
The only exception to this rule is if there are any outstanding obligations or debts owed by the target corporation before they are exchanged for new shares; these must be taken into consideration when determining fair market value.
Is tax advice required?
Share exchanges and purchasing holding companies can have significant tax consequences for your digital agency, depending on the terms of the proposed transaction.
Therefore, it is always a wise idea to obtain tax advice before embarking on any share exchange.
The approachable team here will happily guide you through this process and offer advice and tips that can make this process as seamless as possible.
Upon satisfaction of certain conditions, a share for share exchange will be considered to be a re-organisation for tax purposes and there will be no tax charge to be paid at the time of the exchange.
In the event that a chargeable gain arises at completion of the share exchange, you can apply to HMRC for an advance clearance. This will ensure that you will not be liable to pay any tax.
Williamson & Croft have proven experience within the digital and creative sector and our unrivalled expertise means we are perfectly positioned to work with all facets of this industry – including advertising, digital media, PR, and market research companies, as well as web designers, developers, graphic illustrators, video production and motion picture creators.
Contact us today to find out how we can help you establish a holding company for your digital agency.