Steve Livingston

When tax planning can be good!

Life is a precious gift. Don't waste it being unhappy, dissatisfied, or anything else you can be

Tax planning is getting a real battering at the moment – in some cases, for all the right reasons – but there are many instances where effective tax planning is essential for fast growth businesses and, in fact, positively encouraged by the government.

Aside from printing money to erode away much of our UK budget deficit (…), the Government appreciates that by encouraging entrepreneurs to build hi-tech companies here in the UK then we might have a fighting chance of seeing a brighter economic picture in the short-medium term.

To help us achieve this, the Government introduced 5 key statutory tax incentives that they absolutely and positively want entrepreneurs to claim:

  1. Enterprise Investment Scheme (EIS) / Seed Enterprise Investment Scheme (SEIS)
  2. Enterprise Management Incentive Scheme (EMI)
  3. R&D tax credits
  4. Patent Box
  5. Entrepreneur’s Relief 

As a chartered accountant specialising in advising fast growth companies in these areas – you can find plenty more about these tax incentives on this site or by getting in touch – in my view:

If all UK entrepreneurial businesses took advantage of these five statutory tax incentives (where applicable) and used the funds saved to reinvest in new jobs, new marketing channels and new business ventures; then surely we could reinvigorate our economy with fresh, innovative ip rich companies that can compete on a global scale

Enough of the ‘tax bashing’ – let’s make sure that our entrepreneurs have all of the tools necessary at their disposal if they are to get us back on top – an effective and supportive tax regime for entrepreneurs is one of them (and the good news in the UK is that – for now – we have one…).

Image attribution: @Doug88888 via Compfight

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10 benefits of working with a cloud accountant

  1. We  work together on the same figures – working in real-time.
  2. We can step in and advise early if something looks amiss or where there’s a potential planning opportunity.
  3. You know where you are in terms of business performance now. Today. This week. This Month. And so can act upon it.
  4. We can work at your pace and share our work progress in shared secure online drives – transparency reigns!
  5. We can work together anytime, anywhere. Whether you are in London, Cornwall, Bristol, Aberdeen or closer to home in the north west. Location really doesn’t matter to access the best accountancy services today.
  6. We will always be working on the latest versions of our accounting, CRM, etc saas based software as they can be updated by the service providers online. No more waiting for CD ROM patches and updates.
  7. The days of attempting (and often failing!) to email large files plus the potential for confusion over latest versions are long gone. We handle all data securely in the cloud which makes everything much easier.
  8. New tech add-ons are released regularly to further streamline processes and reduce admin.
  9. Year-end accounting work becomes a formality rather than an information sharing event – there should be no ‘news’ at your year end.
  10. We can now truly become an extension of your management team.

So what are you waiting for…..?

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Buy 10x more equipment and get 100% tax relief!

Not overly helpful to the majority of fast growing UK companies but the annual investment allowance for expenditure on machinery, equipment, furniture etc went up from £25,000 to £250,000 with effect from 1 January 2013.

This means that you could purchase (in theory!) £250,000 of laptops, tablets, desks, chairs etc in a financial year and receive a 100% tax deduction against your taxable profits.

So just imagine, you could splash out on:

and receive £250,000 tax relief!

Not very likely – but still, nice to know….

Watch out for financial accounting periods that straddle the 1 Jan 2013 introduction date as you’ll need to calculate how much qualifying spend is eligible under the ‘old’ £25,000 limit to 31 Dec 2012 and how much falls within the new much higher limit from 1 Jan 2013.

As ever, timing is everything!

(And no, cars do not qualify for relief under this Annual Investment Allowance (AIA) )

 

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HMV woes offers ray of light for smaller brave companies

HK Central Building HMV Group shop

With the grim news that high street giants like HMV are set to fall into administration (plus news that a further 140 retailers are on the critical list), it is easy to feel downbeat and despondent – yet I remain energised and optimistic for the future thanks to the small yet fast growing companies that I am fortunate enough to work with who are bucking the trend by either:

The majority of the BIG high street stores have suffered on all counts. Yet if the internet is eating your lunch – you would think that these huge companies would realise that they cannot carry on with the same old. But they have. Nothing has really changed in these stores over decades. They have been unwilling to take risks or small bets as they have been too busy milking the cash cow. Or too big or too scared to change course. Not for much longer…

These are exciting times. But now is NOT the time to follow the herd.

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5 essential tax tips for innovative companies in 2013

As an ambitious entrepreneur and founder of a fast growth business you may benefit from reviewing the following generous tax breaks as part of your 2013 planning:

1. Patent box – introduced with effect from 1 April 2013, companies will be able to elect into this new beneficial company tax rate and pay tax at just 10%. This new rate of corporation tax will be phased in over a four year period.

Innovative UK companies should be taking steps now to ensure that their patents qualify and apply across the widest possible range of products and services to maximise tax savings.

2. R&D tax relief – the SME R&D tax relief continues to get better and better with the enhanced corporation tax deduction now at 225% with no de minimus spend nor PAYE cap on repayments.

Average claims are approx £40,000 yet less than 1% of UK SMEs claim it – are you missing out?

3. Entrepreneur’s relief – when you come to sell the shares in your company you could benefit from this preferred rate of capital gains tax of just 10% on the first £10m of lifetime gains. You must be an officer or employee of the trading company and hold at least 5% of the ordinary shares and voting rights for the 12 months leading up to disposal of the shares to qualify.

You must ensure that the qualifying conditions are not (inadvertently) breached especially if a sale is on the cards in the foreseeable future.

4. EMI share options – the Enterprise Management Incentive share option scheme (EMI) has long been an attractive tool for retaining and incentivising key employees, however, it’s about to get even better….

It has been a long running source of frustration that the option holders struggled to satisfy the requirements of entrepreneur’s relief (ie they rarely tick the 5% share holding requirement nor the 12 month minimum  holding period), however, changes are afoot to allow option holders to accrue their 12 month qualifying holding period from the date of grant and for sub 5% holdings to qualify. This promises to be a great development.

5. Seed Enterprise Investment Scheme (SEIS) – raising funding for early stage (< 2 years) trading companies is made a whole lot easier when the investors can receive a 50% income tax break on the funds invested (potentially up to 78% tax relief up until 5 April 2013)!

Companies are limited to £150,000 in total under SEIS whereas individuals have a £100,000 annual investment allowance.

These are just a handful of potentially lucrative tax breaks that should be high on your agenda if you are to release much needed cash into your business and get off to a cracking start in 2013!

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25 years v 5 projects: Same yet (monstrously) different!

Lasers

“Life is long – if you know how to use it…”

– Seneca

I am unsure if it is my background of working with venture capital backed businesses but I always find myself thinking in 3-5 year time horizons.

So when I am advising businesses on strategy or exit planning this seems a natural reference point as this is the typical timeframe VCs will tend to use in seeking a return for their investors.

But I think this 3-5 year timeframe is useful for entrepreneurs with respect to how you plan your life.

Let me share a personal example: I try to view my working life in 3-5 year periods and try to allocate a project to each. I use the term “project” broadly which could mean a business, career, job, vocation, whatever. So there is 3-5 year time period to build it (whatever “it” might be) with a view to an exit or delivery on the next phase of growth within this timeframe.

Why is this important and how does this thinking help?

Well I am fast approaching the grand old age of 40 and I have been working on my current project for just over 4 years so I am now thinking:

“I have 4-5 projects left in me – what might they be?”

Thinking I might have 20-30 years of working life ahead of me allows for lazy thinking. In contrast, thinking I might only have 4-5 projects left to immerse myself in over the remainder of my life is sobering (to say the least). 

So rather than plodding on with your business or career, ask yourself how long you’ve been working on your latest “project” and how many projects you might be lucky enough to fit into the remainder of your life?

You might just find your thinking changes and you have a little extra zip in your step – and you might just surprise yourself…

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Getting the most out of SEIS to fill the funding gap

Meet Drink Think, Start-Up Cafe, Coventry Univ...The Seed Enterprise Investment Scheme (SEIS) provides an excellent opportunity for early stage fast growth companies to access funding from founders, family, friends and business angels.

In essence it rewards investors by allowing them to reclaim income tax at a rate of 50% of their investment under the scheme (limited to £100,000 investment per tax year) plus a potential capital gains tax free disposal after three years.

But such a generous tax break comes with (many!) terms and conditions….

Common areas where there seems to be much head-scratching is around the limit for the SEIS investment into the company of £150,000 in total; the limit of £200,000 or less gross assets and the 30% connection test. Note these are just a few of the conditions!

Given the above, how can founders make the most of this SEIS tax break whilst getting the funding they need?

  1. Try to spread the £150,000 total investment between investors / founders to avoid breaching the 30% connection test e.g four individuals with 25% each can work well
  2. Remember the test for the £200,000 gross assets is applied immediately before the issue of the SEIS shares – so you could seek external (non-SEIS) investment top-up funding afterwards. Note that EIS funding is only available once 70% of the SEIS funding has been spent.
  3. Investor(s) could invest an amount as a subscription for SEIS shares up to 30% of the share capital and then loan the remainder.
  4. Investor(s) could invest further amounts in a company by subscribing for less shares but with the remainder being credited to share premium e.g. if an investor / director already holds 29% of the ordinary share capital they could invest a further sum (subject to the SEIS limits) for a further 1% of the ordinary share capital with the remainder posted to share premium.

These are just a handful of examples based on recent experience of advising fast growth companies and investors – as always there are many ways to skin a cat but it is important to review all options to make the most of the UK SEIS and EIS tax reliefs.

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Optimising directors remuneration plus R&D tax credits

So here’s a recent conundrum posed at an R&D Tax Credits Group on Linkedin:

“Has anyone ever done an exercise on a company with a director say on £9000 salary per annum and £40k dividend v a director on £say 54K pa .Both doing 60% R&D . Say Profit £80 before salary and dividend . What goes to HMR&C and what cash does company retain in bank ? Bound to be someone keen to look at that ?”

Using the above example, I have tweaked it slightly to an overall director’s remuneration package of £42,475 (rather than £54k). This is because, if a director would like a remuneration package around this level,  this figure makes better tax sense as it uses the personal allowance and basic rate tax band (tax year 2012/13) with no income subject to higher rate tax.

Taking a baseline control position first, it is generally more tax efficient for a director/shareholder to extract profits from a company as a dividend rather than salary.

For these purposes, I have assumed that in the dividend scenario the director has utilised the personal tax free allowance of £8,105 then taken the remainder as dividend up to £42,475 (there is a marginally more tax efficient way to structure this but I am trying to keep things simple).

Dividends received within the basic rate tax band attract no further income tax plus no NICs for the director.

However, the company tax suffered is higher as dividends are non-tax deductible whereas salary is deductible for tax.

Nevertheless, the director would be better off in the dividend scenario to the tune of a £5,000 saving compared to a salary taking into account both net cash left in hand and in the company (post tax).

However, once we take R&D tax credits into account then the position reverses…

If we assume profits of £80k pre salary / dividend and that the director is engaged 60% in qualifying R&D and receives the 225% R&D uplift on salary costs then the director will be approx £6,000 better off receiving a salary compared to receiving dividends. Note that there can be no R&D uplift on dividends received – only on salary. 

This is some £10,000 improvement in tax savings from the baseline control position of salary and no R&D tax credit claim.

This shows that the default response of:

“A dividend is more tax efficient than a bonus”

can adversely impact on the overall tax profile of an owner managed company where R&D tax credits are available.

This is another example of the need to view a business and its shareholders’ tax position holistically – it all connects; it is dangerous to seek advice on one aspect of your financial and tax affairs without it having a knock-on effect elsewhere in your overall tax profile.

It is vital to crunch the numbers before agreeing a tax optimised remuneration package if you are to make the most of the UK’s fantastic R&D tax incentive scheme.

 

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