This is often the first question that is asked when it is proposed to remove unnecessary legal entities from a group. In theory, the savings can be expressed as an annual, ongoing amount. On paper, this may comfortably justify the up-front costs of planning and implementing a legal entity reduction project.
Various generic estimates can be found of the ongoing cost of maintaining dormant companies. The amounts can range from £5,000 or £10,000 to even £20,000 and £25,000 per company per year. Often these numbers are quoted by consultants or advisers who want to sell you their services. That doesn’t mean that they are not valid, but clearly you need to form an assessment based on your own particular circumstances.
Here's one way to look at things.
Some savings are direct costs of the business. These may include:
• Audit fees
• Company secretarial fees
• Filing fees
• Regulatory filing fees
• Licence fees (if they apply per legal entity)
There may be others, depending on what the group does and how it is owned and regulated.
Another way to look at the issue is to consider what tasks need to be completed for any given company every year, who needs to carry out those tasks and how long it will take. And then attribute a notional daily or hourly cost to that process.
Those tasks may include:
• Preparing, approving and filing statutory accounts
• Preparing, approving and filing annual returns
• Preparing, approving and filing tax returns
• Preparing regulatory disclosures
• Internal audits
Even with a modest hourly rate and a conservative estimate of the time required for each task, it is easy for the total costs to be in the thousands of pounds, euros or dollars.
Of course, this kind of calculation does not automatically produce an actual cash saving if a company is removed. A cash saving would only be realised if the people who were spending time on these things can do other tasks which are equally valuable instead - or if redundancies are made (which is not usually the aim of this kind of project).
Some costs are much less tangible, but no less real. We’ve all been in the situation of starting off a corporate finance or group reorganisation project, and spending the morning with the group structure charts - working out which group companies will be affected, how they relate to each other, and what that means for the project.
Soft costs may include:
• Needing to brief each new joiner to the tax team as to why the group structure looks like it does, and where the sensitivities are
• The incremental time cost of advisers getting to grips with the structure, whenever anything happens
• The additional minutes, resolutions and documents every time a particular company needs to participate in group arrangements, from banking to transfer pricing
• Answering questions from directors as to why a particular company exists and what it does (and if they are not asking questions, you really need to worry).
All these costs are almost impossible to quantify on a group basis, let alone on a per-entity basis.
In practice ...
Often the real triggers for this kind of project are far less rational – such as the proverbial instance of a director getting a paper cut when signing multiple annual accounts. Or a filing being missed, and a director getting a letter from Companies House at her home address.
Despite the difficulty of formulating a definitive statement of the anticipated cost savings, it’s usually important to produce a reasonable estimate. This is because that estimate will often form part of the internal communications which will be critical in securing the co-operation you will need from people across the group.
Get practical advice & insights on the Legal Implementation of Transfer Pricing for Multinational Groups