What does Entrepreneur’s Relief mean for you as a business shareholder?

It was nice to be quoted in today’s North West (registration required) on why now might be a good time for entrepreneurial business owners to consider selling or exiting their business. I thought it might be useful to expand on this short published article.

You may have heard in the fairly recent Emergency Budget that the 18% flat tax rate on capital gains was increased to 28% for higher rate tax payers with effect from 23 June 2010 – the higher rate tax kicks in where total income, including capital gains, exceeds approx £43,000.

So does this mean that you might suffer tax at 28% on the gain if and when you come to sell your business?

For most hands-on digital entrepreneurs the answer should be “No”. On the sale of your business, you should (subject to the qualifying conditions below) qualify for Entrepreneurs Relief which provides a preferential tax rate of just 10% on capital gains crystallised on lifetime gains up to £5m [Note that this increased to £10m].

Compare this with the current super tax rate of 50% for earned income in excess of £150,000 [45% from 6 April 2013]. The difference between capital gains (as suffered on the sale of a business or shares in a company) as opposed to earned income is absolutely critical!

Further, the June 2010 Emergency Budget made Entrepreneurs’ Relief even better by increasing the lifetime allowance from £2m to £5m (saving a potential additional £540,000 of tax) so it is vitally important that you structure your business to take maximum advantage of this valuable tax break [Note that increased to £10m – even more important….!].

Key qualifying conditions for entrepreneur’s relief to apply to the sale of shares in your company:

  • You must hold at least 5% of the ordinary shares and voting power
  • It must be a trading company (most digital, tech and creative businesses would satisfy this condition)
  • You must be an officer or employee of the company
  • You must hold the shares for a minimum of 12 months prior to sale.

So based on these conditions, 20 employee shareholders could theoretically shelter a gain of £100m taxed at just 10%!

It is vitally important therefore that you consider the following potential opportunities and pitfalls in structuring your company shareholdings and arrangements to secure entrepreneur’s relief:

  • % of shares awarded – you would be seriously peeved off if you were awarded 4% of the shares and voting power if, with a little advance planning, an additional 1% could have saved you approx £800,000 in tax if the business ultimately sold out for c£100m – this is a key issue for founders to consider plus for incentivising key management
  • rights attached to the shares – what if you were awarded 10% of the shares of a class that held no voting rights and then found out years later on exit that you were subject to tax at 28% when your colleagues paid tax at just 10% because they all had voting rights (you didn’t think this minor omission was all that important at the start…)?
  • duration of the shareholding – many tax advantaged share schemes such as HMRC approved Enterprise Management Incentive schemes (EMI) used to be more valuable as, not only do they allow you to pick and choose who will be awarded share options, they also allowed for the lowest capital gains rates of 10% under the old CGT regime in pretty much all cases. Not necessarily now… Most EMI schemes are structured such that the options are exercised at the point of a sale of the company or exit, however, if this pattern of facts unfolds you would not have held the shares for the necessary 12 months. You would fail the test. You would have had to have exercised the share options and acquired the shares 12 months before the deal to qualify for entrepreneur’s relief (this assumes that you had the cash to fund the share acquisition which is often a practical difficulty in itself)
  • role of shareholders – there is no requirement to work a specific minimum number of hours or hold a particular post but to qualify you must formally hold a post within the company, either as an officer or employee. Non-executive directors should qualify so long as they are formally engaged – but what does this mean for many angel investors? Also, consider advance planning if you are a husband and wife company – shares can be transferred between a husband and wife (or civil partnerships) without triggering a taxable capital gain so it is sensible tax planning to consider transferring a minimum of 5% of the shares as soon as possible and ensuring that the recipient spouse carries out some role (with a title) in the business.

The key tipping point for shareholders is on gains exceeding £7.5m as this is the point at which the hike in tax rates from 10% to 28% (as opposed to 18%) but compensated for the increase in lifetime allowance to [£5m] (from £2m) really bites.

Although this is splitting hairs for most entrepreneurs as getting the most out of your business at the end given all the blood, sweat and tears suffered in building it is absolutely paramount. So don’t risk leaving it until you (and your team) are sitting on a capital gain of £8m+ before you start thinking about this stuff. Fancy a coffee?

The above information is for educational and entertainment purposes only and does not constitute professional advice. Please contact me if you would like to discuss factors specific to your circumstances or discuss with your professional adviser.

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10 tips on effectively managing your business cashflow

You often hear the quote “Cash is King” and this is absolutely true as many ‘profitable’ businesses go bust. This seems strange but I always remember being taught during my professional accountancy training that:

“There is only one fact on a company balance sheet and that is Cash. The rest is all subject to judgement”

So what steps can you as a business owner take to ensure that your business does not fall victim to the potentially disastrous consequences of poor cashflow?

  1. Run your business in realtime – check your business bank account on a daily basis. Don’t leave things to chance by checking cash on say a monthly or longer-term basis. Project forward expected cash out and inflows so that you can plan for any shortfalls on the horizon. Use some decent accounting software e.g. Xero, so that you have this vital information in realtime at your fingertips.
  2. Take advantage of credit terms on supplier invoices. If a supplier invoice says “Payment due within 28 days” then the earliest you should pay is on day 28. Do not pay it immediately. Better to have the cash in your bank account than in your supplier’s.
  3. Be careful of blindly accepting early payment discounts on supplier invoices. Some suppliers will offer a small discount if you settle the invoice before the due date which can be tempting at first, however, you must be clear on the levels of cash you have in the bank or worse, if you are in an overdraft position, how much it will cost you in interest payable compared to the potentially small supplier cost saving. You really must crunch the numbers and, if in doubt, don’t pay it early – hold on to your cash as long as possible.
  4. Don’t wait until month end before you send out your invoice. It amazes me how often businesses wait until the end of the month before they sit down to tot up who owes them money and how much. Remember, your customers (if well advised) will also be observing points 1 and 2 above so it could be as long as two months before you receive any cash for the work you’ve done. Crazy! The sooner you raise an invoice, the sooner you’ll get paid. Period.
  5. Ensure you have access to an overdraft facility with your bank – even if you don’t currently need it. When times are good and your bank balance is building healthily, it is tempting to avoid thinking about potentially darker and more lean times ahead. However, this is exactly the time that you should be approaching your bank to agree that overdraft facility – and not when your back’s against the wall and the cash is drying up.
  6. Think twice before extracting (too much) cash from your business at the year end. It is often preferable to work with your accountant to manage your remuneration strategy to retain some cash in the business to a certain level e.g. by way of loan to the business, whilst at the same time optimising your business and personal tax position. This way you have the best of both worlds.
  7. Try to operate a “No surprises” policy when it comes to late payment to your suppliers or creditors – this includes HM Revenue & Customs. Allowing owed balances to build up with little prospect of payment in the near future (and leaving your creditors blissfully unaware) is storing up trouble. A little advance strategic thinking is advisable as to whom you approach e.g. better (although not ideal) to upset your non-core suppliers first, unless you have a good long-term relationship and understanding with them. Speak to your accountant first.
  8. Approach your best customers for prompt payment if things are looking at a bit tight. Hopefully they will be supportive and understanding particularly if you have built up a good relationship with them (see point 7). You could incentivise them with a small discount or special offer.
  9. Don’t let old stock or services build up and gather dust. Turn them into cash as soon as you can even if you recover a tiny sliver of the original selling price. If you are concerned about potentially tarnishing your brand with cheaper lines then consider an online offshoot venture with a different name (or ebay account?). This is what the Big Players are busy doing.
  10. Trim your expenses. You can always shop around for the best deals on overheads and other business costs. Review all suppliers’ costs at least annually. You can of course outsource this process given that you have a business to run!

Effective management of your business cash-flow is essential to its long term survival. By carefully integrating the above 10 steps within your business strategy, you should find yourself in a much stronger position to weather any storms that may lie ahead.

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A business idea shared is a business (almost) launched!

As a budding entrepreneur, its understandable to want to hold onto and covet that killer business start-up idea.

If you are on your own and perhaps struggling to drive the new business idea forward, the danger is that with every day you let pass, someone else gets closer to climbing ahead of you and launching the same or similar business. Or the pain or need that your idea solves becomes obsolete or outdated.

You need to share your vision or idea with as many people as possible.

This has three main benefits:

  1. It allows you to develop and hone your idea from the feedback received from others. This will save you a lot of (potentially wasted) time, energy and money in the long run, AND
  2. It provides an opportunity for others to introduce you to the people who may hold the key to launching and making your new business a success. Either as investors, future partners or just folk who’ve been there and done it, these contacts can be invaluable. Heck, you might even stumble across these people directly if and when serendipity steps in to plays its hand! AND
  3. It holds you accountable to carry out your plan. It is an act of commitment. Once you share your idea with the world, people will either cheer you on your well earned success or scoff if you limply throw in the towel. Its like having millions of personal trainers. Speaking of which (sort of) – Just do it!

If you remain unconvinced by the prospect of sharing your idea with the world, I’ll leave you with the following two assertions to ponder:

  1. Most people are busy running their own lives with their own priorities, issues, hopes and fears. The chances of anyone you meet thinking “that’s a great idea, I think I’ll steal it and go do it myself” and then having your passion and your insight to see it through are remote.
  2. The best innovators are businesses that are unafraid of the competition. They have complete confidence in themselves as game-changers at the cutting edge of their industry. Therefore, as fast as anyone tries to copy them, they know these competitors will only ever be mere pale imitiations.  They also wallow safe in the knowledge that the well of creativity and ideas is without end – think Apple. Nuff said.

Are you ready to share now?

Caveat – the above advice should not be applied in the case of new intellectual property or technical specifications e.g. software coding; technical drawings or know-how etc, which should remain top secret and protected.

11 essential action points after starting your company

Better to be a disciplined entrepreneur from day one. Here is a checklist of 11 tips how:

  1. Get your company incorporation certificate, Memorandum & Articles of Association downloaded and on file. Plus a shareholders agreement if you have one. This will form the basis of your statutory books which you must maintain for any changes in shareholders, directors etc going forward.
  2. Complete and file Form CT41G with HM Revenue & Customs to register your company for corporation tax purposes and to get your employer payroll package ordered and registered with HMRC (or refer to point 11).
  3. Get the relevant documents (in point 1) plus your passport and a recent utility bill together ready to set up a business bank account (get used to pulling together these personal docs for routine money laundering checks for pretty much all financial services).
  4. Set up an A4 lever-arched file ready to collate all of your paper invoices received for amounts payable. Put a divider in the file to separate paid invoices (behind the divider) from the unpaid invoices (in front of the divider). Start numbering the invoices received sequentially to (ideally) match your online accounting software (see point 6).
  5. Decide whether it is right for your company to register for VAT (or refer to point 11).
  6. Choose a decent accounting package so that you can get all of your financial affairs including invoicing etc set up ready. I like Xero.
  7. Check your founder(s) shareholding allocation now e.g. if there are any shares to be allocated to key (present or known future) management / employees do it now or asap before the value in the business (and therefore shares) increases. If you delay you could store up some nasty capital gains tax, income tax and national insurance liabilities for the future…
  8. Get all your ducks in a row with regard to all industry certification and insurance requirements for your particular sector. Would be embarrassing and unprofessional to get this wrong.
  9. Think now about protecting your crown jewels. Is there any intellectual property, trademarks or patents that need filing, protecting or transferring before you launch your BIG idea or go head-to-head with the competition?
  10. Go get yourself a natty logo, stationery and website. Remember to include your company name, address, registered company number and VAT (if applicable) on your documentation. Get business cards too. Register your Twitter account. Start a blog. Tell the world.
  11. Get yourself a supportive accountant and tax adviser who understands your niche :)

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7 tax incentives for UK digital & technology startups

HOT OFF THE PRESS: We’ve just launched a brand new online course that shows you exactly how to complete and file your SEIS / EIS advance assurance application with HMRC. We walk you through every stage of filling out the form plus share some additional resources to help ensure a smoother passage through HMRC. Access it by clicking here. [Use the code: SEISAA2017 to get 50% off in January]

Having taken the risk and side-stepped the typical job route to become a tech entrepreneur and wealth-creator, its a good job that there are still some tempting UK tax incentives out there to support you.

Here are just 7 tax ideas or tips that you should be thinking about for your digital technology start-up:

  1. Entrepreneur’s Relief – if you hold 5% or more of the shares in your startup for 12 months and work as an officer /  director or employee, then when you come to sell the shares your effective tax rate will be just 10% on the gain. This is limited to the first £10m of gain over your lifetime . Sure beats an income tax top rate of 45%! Make sure you take this into account when setting up your company to ensure founders (and key employees) maximise this essential tax relief. You’d be gutted if you unwittingly held just 4% of the shares!
  2. R&D tax credits – get rewarded by the tax man for innovating in your sector by claiming this lucrative tax relief. Many entrepreneurs mistakenly believe that this tax incentive relates solely to industries with scientists wearing white lab coats but this couldn’t be further from the truth. This relief applies across industries – I have enjoyed particular success in the tech sector, for example, I have secured a £250k tax refund for a tech startup that had been (wrongly) advised by its accountants that it wouldn’t qualify for this relief! Most repayments are processed by HMRC within 30 days of a claim and you only have 2 years to make a claim before you’re time-barred. Don’t leave this cash on the table.
  3. Enterprise Investment Scheme – angel investors and private individuals are incentivised to invest in (perceived) higher risk investments like early stage start-up companies with tax breaks like the Enterprise Investment Scheme (or EIS as its more commonly called). Now is not the time for the exact detail suffice to say that many tech or digital startups would fall within the qualifying criteria thereby allowing smart investors to reclaim 30% income tax relief subject to certain limits. Just be aware for now that this is out there to tempt investors. [Update: Seed Enterprise Investment Scheme (SEIS) introduced since this post]
  4. Temporary National Insurance Holiday – for new businesses there is a recently announced temporary NI holiday for the first 10 employees limited to £5,000 per employee or £50,000 overall. The scheme officially kicks off in September 2010 however there should be relief for businesses started post 22 June 2010. This relief is location specific with most of the South East barred so you need to check qualifying locations. Startups across the North will qualify so now is a good time to start building your team.[Update: Now gone – there is an Employer’s NIC £3,000 annual allowance at the time of writing Jan 2017]
  5. Get paid at mouthwatering tax rates compared to most employees – once you get past the pre-revenue stage and start making profits, shareholders of small companies have the flexibility to structure their remuneration package to optimise take-home pay. Why pay up over 20%, 40% or even 45% income tax and incur huge National Insurance costs on employee salaries when you can pay yourself a combination of a small salary, dividends (and pension contributions) which, if carefully managed, can result in £nil income tax or NI for c£40k of remuneration. [Update: Dividend tax rule changes since 6 April 2016 reduce benefits]
  6. Get 100% tax relief on your new equipment – so you need to invest in new Macbooks, laptops, servers and other gadgets for your business. You can claim 100% tax writing down allowances (‘Annual Investment Allowance‘) against profits on your ‘first’ £200,000 (!) of capital expenditure each year [note: this relief has bounced around in recent years since; be wary of timing – it is £200,000 at the time of this update (Jan 2017)]
  7. Patent innovation box – coming soon (allegedly) will be a ‘patent box’ which will allow income or profits on registered patents to attract lower company tax rates of c10% (as opposed to a current lowest corporation tax rate of 20%.

If you’d like to discuss how any of these tax incentives could be applied in your business, please drop me a line via the contact page or you can find professional specialist advice and help at ip tax solutions. Happy to discuss.


Seeking Seed Funding: 12 tips for early stage startups

I was recently put on the spot at a Technology event and asked how much I would charge for assisting a tech startup in preparing a business plan to secure investment funding.

I answered “it depends”.

A cop-out? Not in my opinion. Why?

Because it depends on where you are in the investment cycle.

If you are seeking early stage seed capital then spending hours (and lots of cash on professional fees) on a detailed business plan will probably turn out to be a waste of time because most investment managers or angel investors will be interested solely in:

  1. the scale of the market opportunity and
  2. the commitment/enthusiasm/experience of you and your team.

The rest is all pie-in-the-sky – you know it and they definitely know it!

But as an early stage start up, how do you make the right first impression to be able to enter into meaningful conversations with potential investors and ultimately pave the way to attract venture or angel funding?

You need an introductory prospectus flyer or one-page teaser that hits the key points of interest to an investor. Getting the content and tone right is key.

Here are some of the key questions I think early stage start-ups should be addressing:

  1. What’s the open goal in the world that your product or service will  fill? Killer question demanding a killer answer.
  2. What is it that your competitors are not delivering or are incapable of delivering? (Don’t over flatter yourself. They are already up and running. You are not. Be courageous enough to acknowledge their strengths but pick out the areas where you plan to differentiate and thrive.)
  3. How would your customers describe the pain they are suffering and how does your product or service solve this? What would they do without you? (perish the thought!)
  4. How much more will it cost to get your product or service out to customers? Is it finished and ready to roll or do you need more investment in product development and research?
  5. Where has the technical know how come from? Are you entitled to commercialise the rights? e.g. Is it coding that you as founders developed yourself or have you used third party software or coding (other than open source)?
  6. How will you reach out to your customers? What is your planned mode of attack? Distribution channels? What will it cost? Is there anyone out there who you can partner with? If so, who? Be specific. Don’t say that you’ll rely on word of mouth or viral marketing or solely on some mode of social media. It could happen. That’ll be a bonus. But don’t hang your hat on it.
  7. How will you continue to grow sales or revenue without incurring a corresponding increase in costs? The posh phrase is “is it scalable?”. Investors like scaleable businesses. Why? The clue’s in the question.
  8. How easy will it be for others (especially your competitors) to copy you? Again, posh phrase is “do you have any barriers to entry?”. Barriers to entry might include technical know-how that could take competitors months or even years to crack – even better if you have patent protection. How much might it cost for your competitors to get up to speed? Would it be possible for you to set up quietly and hoover up a discreet market? You could them move onto another market niche or segment and another before the big players have cottoned onto this new challenger in their midst. This buys you time and the chance to build a fighting fund of cash and expertise before you go head-to-head…
  9. What’s the 3 – 5 year vision? Sure, things will change. You don’t have a crystal ball but you need a road plan with target dates and milestones. When will you break-even? When will you hit £X’000 revenue and profits etc?
  10. What are the big unknowns? What could go wrong and what steps are you taking now to mitigate these risks?
  11. Are there any other success stories in your sector? What values did they exit for and how quickly did they do it? Where did they make mistakes and what will you do differently?
  12. What’s your story? Where have you and your fellow founders emerged from? Do you have stories of previous success in similar sectors? Have you built and sold other businesses? Are you from a corporate role which is aligned with your new venture thereby giving you valuable inside track experience? Are any of the founders still in fulltime employment and what are the plans for taking this business to the next level? Investors will want to see enthusiasm, passion and ideally a proven track record of success and relevant experience. (Avoid flossing up your previous experience with overly grandiose claims. Stick to the KISS mantra – Keep It Simple Stupid!).

Concentrate your mind on these sorts of issues and it should save you a lot of time, effort (and cash!) in securing investor funding.

This list will no doubt keep on expanding but please suggest any other key criteria that you think is key for startups seeking funding.