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Tax Matters: R&D tax credits; Patent Box plus SEIS / EIS course

Here’s a round up of some recent financial & tax news that might be of interest – you can find an audio download version of this post below:

Calls for quarterly R&D tax relief for SMEs
In an effort to boost SME cashflow, there are calls for the Government to make the UK R&D tax incentive a quarterly rather than end of year tax relief. Currently SME companies claim R&D tax relief retrospectively. Large companies can, however, reduce (in year) quarterly instalment tax payments that they are required to make thereby securing the benefit of the relief earlier. This measure would help level the playing field. This makes sense – we’ll have to wait and see…

March Budget 2016 – Pension countdown
George ‘O’ will step up on 16 March 2016 to deliver his Budget Statement and the big news is expected to be regarding restrictions on income tax relief on pensions for higher rate tax-payers.

Action point: Consider making pension contributions in advance of the Budget date.

Patent Box changes afoot – act now
New, more stringent rules will apply to companies that elect into the Patent Box tax incentive after 30 June 2016. This follows the ‘beating’ this UK Gov tax incentive received from other EU states following its introduction in 2013 (but for how much longer in the light of a possible Brexit….?).

Action point: If you have a patent or patent pending, consider electing in before 30 June 2016.

Get ready for new dividend tax rates
From 6 April 2016, new dividend tax rates will apply that results in an almost complete shake-up of the fairly established remuneration structures for most owner-managed companies.

Action points: Run some calculations to see how you might be affected and consider paying further dividends in advance of the 5 April 2016 deadline. Note that companies that qualify for R&D tax relief might have some of the down-side offset by receiving a greater proportion of the remuneration in the form of PAYE salary / bonus and claiming enhanced R&D tax relief (dividends are not eligible).

Buy-to-let changes – traps for the unwary
I probably don’t need to tell you more about the widely publicised restrictions being placed on buy-to-let interest relief etc but watch out for the Stamp Duty Land Tax (SDLT) 3% surcharge that can bite in what might otherwise be fairly innocuous circumstances…

For example, buy a new residential house before selling old residential house = 3% ouch! You might be able to receive a refund in these circumstances but the initial additional SDLT outlay can be significant and is yet another case of a tax sledge-hammer to crack a nut!

SEIS / EIS Course Launch
By popular demand, we have set up a new course setting out in the ins-and-outs of the hugely popular (yet often misunderstood!) Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).

These UK Government tax incentives are growing in popularity – especially with the growth of crowd-funding platforms such as Crowdcube. We have helped and continue to help 100’s of companies navigate and make the most of these tax reliefs which can be quite tricky to navigate for the uninitiated.

If you are a company founder or considering diversifying into business angel investing yourself, you should benefit from this course.

You can sign up to receive the course via email here:

GF003 – Get Funded! podcast – What are the key tax benefits of SEIS?

Get funded!In this 3rd episode of the Get Funded! podcast we explore the key tax benefits of the Seed Enterprise Investment Scheme (SEIS) including:

  • 50% income tax relief
  • potential for 14% capital gains tax shelter
  • IHT exemption after 2 years
  • CGT free sale after 3 years
  • Sideways income tax relief should the startup fail

All in all this can amount to up to 86.5% tax shelter for the investor so only 13.5% capital may be at risk.

What will the 7 May election mean for UK tech companies?

As we run up to the 7 May 2015 election, thoughts turn to what the result might mean for UK startup and fast growth companies?

Techcrunch has noted the partisan approach that UK tech companies seem to be taking in writing a letter in support of the Conservative Party and points out that this stance should be taken with a pinch of salt (although I understand the article was penned by a declared Labour supporter ;) ).

I don’t want this to fall into a political rant but I sense there is a lack of transparency in the Labour party’s stance on how it might build on the successes that we have already seen in terms of tax policy for UK tech and fast growth companies.

For example, the Conservatives have made great strides in the following areas:

  • The introduction of Seed Enterprise Investment Scheme (SEIS) and its generous tax incentives to support investment into early stage companies to supplement the Enterprise Investment Scheme (EIS) aimed at more established companies
  • The improvements made to the Enterprise Management Incentive (EMI) share option scheme to allow participants to benefit from Entrepreneur’s Relief despite potentially not holding the shares for 12 months nor even holding more than 5% of the share capital
  • Improvements to the R&D tax credit incentive scheme that now boasts a 33.3% return for claimant SME companies
  • Introduction of the Patent Box at its beneficial 10% corporation tax rate – despite challenges from across the EU
  • Enhancements to Entrepreneur’s Relief that now allows entrepreneurs to benefit from a 10% CGT rate on the first £10m of lifetime gains
  • Reduction in the main corporation tax rate down to 20%
  • Plus video games tax relief and other reliefs for creative and digital companies

Taken together these measures keep the UK on track to meet George Osborne’s pledge to make it the most attractive place to do business in the G20.

It is worth noting that many of the above tax incentives were first introduced during Labour’s last bout in office; albeit in a more watered down form in most cases – although who’s to say that Labour might not have followed a similar path had they stayed in the office…? Truth is, we don’t know.

And herein lies the problem…

Labour do not appear to have shared much detail on their thinking and policies around these areas and, in particular, these specific tax incentives. The danger is that an incoming party wants to “shake things up” and “make their mark” which may threaten the stability and progress made around these important areas for UK entrepreneurs.

We may just be about to find out more…

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March Budget 2014 – Key points for Digital, tech & creative companies

Highlights include:

  • Increase in payable R&D tax credit for loss-making SMEs from 11% to 14.5% for expenditure incurred on or after 1 April 2014. This means that approximately 33% of qualifying spend is eligible for a tax credit rather than the current 24.75%
  • Seed EIS (SEIS) turned into a permanent tax relief given its success along with the 50% CGT exemption for gains reinvested
  • Doubling of the Annual Investment Allowance from £250,000 to £500,000 for expenditure incurred on or after 1 April 2014 for companies until 31 December 2015. This will allow 99% of companies to get 100% write off of their investment into capital expenditure in the year of expenditure (excludes buildings and most cars).
  • Personal allowance increase to £10,500 from April 2015 (£10,000 from 6 April 2014) and an increase in the basic rate tax band to allow higher rate tax payers to receive some of the benefit.
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Has your company missed out on EMI too?

Screen Shot 2013-07-01 at 20.00.45Enterprise Management Incentive share option schemes (or ‘EMI’ for short) have long been a useful tool for entrepreneurial fast growing companies that wish to both tie-in key employees and incentivise them tax efficiently with the promise of jam tomorrow in the form of a slice of the share equity.

The peculiar thing as evidenced from the chart above is the apparent lack of take-up by start-ups and SMEs – even ignoring the flat-lining in recent years which could be attributed to the general market malay – in that only approx 7,500 companies have an EMI scheme across the entire UK…! Which begs the question:

Is your company missing out on an EMI share option scheme?

Before going any further, its worth having a brief recap on the key tax benefits of an EMI share option scheme for qualifying companies:

  • No income tax or NIC cost on grant or exercise of the EMI options
  • Growth in shares under EMI option subject to capital gains tax (CGT) rather than dreaded income tax (45% anyone?!)
  • Potential for Entrepreneur’s Relief for EMI option holders even though they may ultimately hold less than the normal required 5% shareholding plus the 12 months accruing from grant of the share option (a MASSIVE recent change)
  •  Corporation tax deduction for the company on exit in most cases.

Admittedly the entrepreneur’s relief relaxations (which I have long banged on about!) are fairly recent changes; but still, the benefits are plain to see, compared to say unapproved share options which normally have income tax and NIC written all over them…!!!

Let’s not forget that for cash-strapped start-ups and early stage companies, the ability to give highly valued employees a stake in the company with no cost outlay is a huge deal especially in the current economic climate – also, note how the company can get a tax deduction (on the increase in value between the exercise price and market value) even though the company has not incurred an expense as such!

There is also flexibility as to how and when employees can exercise the EMI share options  e.g. with some being structured as ‘exit only’ options (ie the EMI options vest only minutes before a sale of the company) and /or performance criteria can be included to keep the relevant employees on their toes!

So why poor take up for EMI share schemes in the UK?

Here’s my take from experience of talking to entrepreneurs about structuring tax efficient employee remuneration planning and EMI’s in particular:

  1. Unawareness of the scheme – sad but true, many accountants have not advised their clients that such a mechanism exists to incentivise their employees tax efficiently for both themselves and the employing company. 
  2. Too complex & costly – this is normally a misconception. Okay, the rules can be cumbersome in parts and there are some strict eligibility requirements but if you work with advisers who have implemented EMI option schemes before, this should be a problem. The costs should be far outweighed by the savings – oh, and  our professional costs for setting up EMIs are tax deductible!
  3. Bad experience in a ‘previous life’ – this can be an issue where unrealistic expectations are set when the option scheme is set-up and things don’t materialise as expected e.g. no exit occurs within the expected time-frame or if it does, the gains for the EMI optionholders turn out to be fairly paltry compared to the vision painted at the outset. Sometimes the very employees who suffered at the hands of a badly communicated EMI scheme set-up are now at the helm of their own company and are understandably fearful of inflicting the same disappointment on their own team. Managed well, this should not be an issue but it does come up…
  4. No clear exit plan – EMI’s are designed for entrepreneurial fast growing companies and, although a company can’t have an immediate sale on the cards when it sets up the scheme, it needs to have a time-frame and clear action plan for how it will allow its employees to realise the value they hold in the paper that will turn into shares. Like point 3, we’re down to managing expectations…

What’s your experience of EMI option schemes (good and bad)?

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10 need to know facts about the UK Patent Box

Patents are only for the old machine

You may already be successfully claiming R&D tax credits for your fast growth company. If so, you might be wondering what’s next in terms of tax incentives to assist your business once you have gone beyond the research and development phase and into the phase of commercial exploitation?

Up until now, there hasn’t been much….

However, we now have the latest UK tax incentive for intellectual property rich companies – the Patent Box, which kicks in from 1 April 2013.

The UK Patent Box is a £1bn+ tax incentive that represents potentially one of the most significant tax incentives ever introduced in the UK.

Here are 10 facts to get you started – plenty more detail to come in future posts:

  1. 10% corporation tax rate will apply to company income falling within the Patent Box – this more than slashes the corporation tax rate in half!
  2. Applies to qualifying patent derived profits generated from 1 April 2013 – 10% tax rate phased in over four years
  3. Companies must satisfy specific ownership requirements to one or more patents to fall within this regime
  4. Patents must be granted for the relief to apply. For patents pending, you can track the relevant income for six years and claim the tax relief upon grant
  5. Patent must be granted by certain designated patent offices to qualify: the UK Intellectual Property Office; the European Patent Office or other patent offices within certain designated EU countries
  6. Companies must take an active role in developing the invention to which the patent applies to qualify – passive ownership will not suffice.
  7. For groups, the company that holds the patent must carry out an active role to manage the IP
  8. Relevant patent profits are calculated by applying either an apportionment or streaming methodology – apportionment is the default calculation methodology
  9. Disappointingly the calculations are complex as you must run through a six stage process to reach the qualifying relevant patent profits –  but this is where we can help.
  10. You enter the patent box regime by election – it is not automatic.

Given that this relief kicks in from 1 April 2013, your company may already fall within this regime if your financial year end falls after this date e.g. those with an April, May or June  year end!

If you already have patents or are considering filing patents, you need to start planning now to maximise this opportunity. 

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