Tax N2K

2010 Year End Tax Planning Tips for UK Entrepreneurs

Given that the 5 April 2010 UK tax year end is imminent, we are busy advising our UK entrepreneurial clients on ways in which they can arrange their tax affairs to pay the right amount of tax – and not a penny more!

Here are just some of the issues we’re discussing – remember, you should seek advice specific to your circumstances as these are general points only:

  1. For those typically earning more than £150,000 per year, the new 50% super higher rate of tax will hit hard when it is introduced on 6 April 2010. So we are advising those likely to be affected either to bring forward bonus payments or, where they are shareholders and sufficient distributable reserves exist in the company, to pay a dividend by 5 April 2010. An accelerated dividend payment is preferable in most cases as this is normally more tax efficient plus there are National Insurance savings. A word of caution – watch out for the pension anti-forestalling provisions if you are taking steps now that might increase your total income above £130,000….
  2. From 5 April 2010, the personal allowance available to all UK individuals will be tapered away for earnings in excess of £100,000. This means that for those with income falling between £100,000 – £112,950 in the 2010/11 tax year, the effective income tax rate will be a whopping 60%! Taking steps now either to advance salary payments to pay the current highest rate of 40% or to structure arrangements to fall outside these bands will save hard cash.
  3. Making pension contributions (either personally or via the entrepreneur’s company) can still make good financial and tax sense, however, beware of the restriction on higher rate tax relief for high earners from 6 April 2011 – in an attempt to stop savvy folk from piling cash into their pensions in advance of these measures, the Chancellor introduced some hideously complex rules called the pension anti-forestalling measures that limit higher rate tax relief on contributions for those whose income exceeds £130,000 (either now or in previous recent tax years) to £20,000 (or up to £30,000 in certain circumstances). Seek professional advice if you think you might be affected.
  4. Consider transferring income generating assets to spouses in cases where the spouse is a non-earner. Given that every individual receives a tax-free personal allowance and a 20% tax band up to c£45k it makes sense to consider splitting income where possible – be wary of splitting dividend income in husband and wife companies where only one spouse is active in the company.
  5. Every individual has a capital gains tax-free annual allowance of £10,100 (in 2010/11) so make use of this to crystallise gains where possible – if you don’t use it, you lose it.
  6. The highest rate of capital gains tax is still only 18% compared to 40% (soon to be 50%) for income. Also, compare the income annual personal allowance (c£7k) with the capital gains tax allowance (c£10k). Could this influence your investment strategies going forward to favour capital growth rather than income? Beware of the time horizon though as this gaping difference is unlikely to endure for long… [Update: 22 June 2010 Budget increased highest rate of CGT to 28%]
  7. Every individual (over 16) can invest in a tax-free wrapper called an Individual Savings Account (ISA) in which interest income on cash or capital growth and dividends on shares is tax free. Most have a £7,200 allowance to 5 April 2010 and this goes up to £10,200 from 6 April 2010. Drip-feeding savings provides the benefit of cost-pound-averaging which can provide better returns than piling in lumps sums on 5 April each year!
  8. Many entrepreneurs are unaware that they can invest in pensions on behalf of their non-earning children and still obtain basic rate tax relief up to £3,600 – so you need only invest £2,880 and HM Revenue & Customs will kindly top it up to £3,600!
  9. Those with furnished holiday lets that haven’t performed to expectations have a short window of opportunity to obtain business asset tax treatment on a sale of the property up to 5 April 2010 – this allows for more tax advantageous income and capital gains tax treatment but time is running short… [Update: 22 June 2010 Budget extended this opportunity for a further 12 months]
  10. Useful additions to an entrepreneur’s investment tools include Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) which offer differing but welcomed income tax and capital gains tax benefits.

Above are just 10 tax planning ideas that we are busy discussing with our entrepreneurial and family owned business clients. Hopefully your accountant is doing likewise. If not, please contact me and we can discuss your specific circumstances.

Take steps NOW to review your tax position. Time is running out for the 5 April 2010 tax year!

The above analysis is a general summary of some tax planning opportunities available for UK individuals in the run up to 5 April 2010 and should not be relied upon. Please seek professional advice specific to your circumstances.

Photo credits – Roll the dice

Fun + games for the Budget 2010

Today was a busy day working alongside the Manchester Evening News to provide exclusive business tax coverage of the Budget 2010.

I won’t cover the detailed proposals here now as a) you can Google Budget 2010 and get a ton of facts + figures and b) you can get my initial reactions by visiting the M.E.N. Business section of the site.

Suffice to say that there were a lot of promising proposals for UK fast growth companies (including the video gaming industry – which is great news) but we are still lacking the crucial detail which will be key – I will update as the details emerge.

It was good fun to interact via Coveritlive as the Budget unfolded. Listening to Alistair Darling speak, digesting the info whilst reading and interacting with Coveritlive comments (many humorous comments too – thanks!) was both fun and challenging. You can replay our coverage here.

What announcements for UK business caught your eye? Please also feel free ask any questions following today’s Budget below.

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Making BrITain Great Again – Intellect launch Technology Manifesto

Intellect launch their Making BrITain Great Again Technology Manifesto with a call for investment in supporting intellectual property rich (IP) technology companies in order, not only balance the books, but to rebuild a stronger UK business base for the future.

This technology manifesto identifies 4 types of technology business needing support and encouragement:

  1. Early stage tech start-up – great idea but need support, encouragement and investment
  2. Established technology companies – proven track record and growing
  3. Leading IT companies – becoming world players
  4. Global IT companies – already world players that we would like to see make the UK their home.

Key proposals that caught my eye in the 16 page report include:

  • simplifying the Enterprise Investment Scheme (EIS), including allowing entrepreneurs who participate directly in the running of the business to qualify for income tax relief – currently the legislation is designed to incentivise angel investors who are not the founders of the business to invest.
  • extending the Corporate Venturing Scheme from 20% to 30% tax relief in order to encourage investment by larger businesses into smaller tech companies. The manifesto points to the success of Silicon Valley investment by corporates into smaller businesses.
  • further simplifying the R&D tax credit regime to encourage further successful claims
  • careful monitoring of the UK corporation tax rate to encourage inward investment of overseas technology companies
  • ‘tax holidays’ for cluster areas of technology companies within designated areas or business parks.

I welcome this report as further progress on a growing body of recommendations and manifestos (e.g. Ingenious Britain and the Conservatives Technology Manifesto all released within recent weeks) that seek to put technology and other advanced emerging sectors at the forefront of growth for Britain – even better, they seek to achieve this by rethinking tax incentives and support mechanisms for these high growth sectors.

Download the report here.

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R&D tax credits get thumbs up in Tory Technology Manifesto

Hot on the heels of the Ingenious Britain report by James Dyson, the Conservatives have released a disappointingly limp Technology Manifesto. Although its key aims build on many of the promising ideas set out in the Tory commissioned Dyson report – in aiming to position the UK at the forefront of global technology and science based exports – it unfortunately lacks any great detail (I’m all for brevity but 11 pages?!) plus it appears to veer off track in many parts (not sure how publishing data like….public sector salaries over say £150k etc is going to put us at the leading edge of global tech commerce? Worthy aim, wrong manifesto).

To its credit it promises to implement many of the proposals set out by James Dyson as soon as possible which sounds promising plus it singles out R&D tax credits as being retained and simplified – although unfortunately no mention of increasing the tax relief to 200% as Dyson recommended (although this is still a vast improvement given the rumour that the Conservatives were, up until very recently, considering abolishing research and development (R&D) tax credits altogether in an effort to simplify the UK corporation tax regime.

There is also talk of implementing a superfast broadband network of 100mbps that is some 50 times faster than Labour’s proposed super broadband network but the detail on exactly when and how this will be achieved is also notable by its absence.

Overall, I am delighted to see that the Conservative party is choosing to focus its efforts on pushing the boundaries in making the UK a leading global technology and science friendly location to do business, we could just do with a little more detail – as we’re not the only ones with this lofty ambition.

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Dyson backs ingenious Britain + Changes ahead for R&D tax credits & EIS?

James Dyson hits out at the existing “lacklustre” UK R&D tax credit system and its “botched” implementation by HM Revenue & Customs.

Dyson is right in his assertion that the recent tightening of policy in restricting certain claims (e.g. for prototypes that are eventually sold) is fundamentally flawed, however, my experience of working with the specialist R&D HMRC units has been positive overall.

Sure, the legislation is complex in parts but this is inherent in a system that seeks to adapt for ever-changing claims in line with the emergence of new industries. It should be added that much of the complexity has arisen from attempts to enhance the attractiveness and availability of the research and development tax credits for UK companies!

Dyson suggests that a new improved R&D tax credit scheme be implemented that is simpler to apply and that should be targeted at small, high tech companies. Although I sympathise with the principle of helping many of our future innovative small businesses, such a policy is misguided in its laser focus as it omits larger, more diverse companies that can equally contribute to the UK economy from successful R&D.

An increase of the R&D tax credit rate to 200% (from a current rate of 175% for SMEs) could further increase the attractiveness of the UK as a place for internationally mobile companies to do business – the UK currently ranks 19th internationally for the attractiveness of its R&D incentive regime.

To shift from recent murmurs of a Conservative government (if elected) abolishing the R&D tax credit scheme (in order to simplify the UK company corporation tax regime) to actually improving the regime if the recommendations from this report (commissioned by the Tories) are implemented is welcome news.

Enterprise Investment Scheme (EIS)

Meeting the funding gap for start-up and fast growth hi-tech technology companies has always been tricky given the higher risk of failure – the recent credit crunch has made this a whole lot worse. Angel investors (or micropreneurs) have frequently come to the rescue as, not only can they bring their expertise to the table (particularly if they made their money in a similar sector), but they can also invest in smaller tranches to meet this funding gap where the companies are too small for larger private equity or venture capital funding – and where the banks prefer to look the other way.

Despite the existence of UK angel funding, Dyson notes that over £3.5bn would have been invested if the UK kept parity with angel investment in the US – actual investment in the UK was a disappointing £1bn in 2007.

Tax incentives are available to encourage private investment in UK fledging companies including EIS which provides 20% income tax relief subject to qualifying holding requirements and company types. Dyson calls for an increase in the income tax relief to 30% which should be welcomed, although how far this would go in encouraging wealthy individuals to part with their cash to invest in start-up tech companies remains debatable – unless they have a deep understanding of the sectors.

Overall, James Dyson calls for a change of perception towards science and technology from grassroot levels with greater focus on such subjects at school. He cites a frightening statistic that:

4% of teenage girls want to be engineers

14% want to be scientists

32% want to be models

There is clearly much work to be done!

Welcome your views. You can download the Ingenious Britain report here.

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UK Innovation Investment Fund – Too little, too late?

Launch of the £200m UK Innovation Investment Fund could not come at a better time as funding for early stage technology, digital and life science companies continues to dry-up – worrying given that these are the innovative fast growth companies that our UK economy is relying on to dig us out of our UK budget deficit. Dow Jones VentureSource estimates that venture fund-raising for investment in early stage tech companies is down from 210 in 2005 to just 86 in 2010.

Although news of this additional funding is good for entrepreneurs and start-up ventures, there is a risk that it could be a long while before the cash trickles down to the fledgling businesses that need it most – like now! In the meantime, it is predominantly more adventurous private investors who are picking up the slack. A welcome form of microfinancing by microangels, perhaps?

Rather than relying simply on showering (further) State Aid, I do believe that we need to think more adventurously about introducing further tax incentives for our exciting and innovative new start-ups. This could also provide further stimulus for smaller (but welcomed) financing from private investors who can match the risk against tax incentives even with smaller (micro)investments.

Consider that there is currently no difference in UK capital gains tax payable between selling a property or shares in a start-up company as an external investor (CGT rate of 10-18%).  Does this accurately match the risk / reward? I think not.

Consider also that there are murmurs of a Conservative government removing the highly valuable R&D tax credit incentives in order to simplify the corporation tax main and small company rates – where is the incentive to break the mould and create game-changing businesses under this policy?

At least announcements were made in the Pre-Budget Report that we should see a lower rate of corporation tax for patent income but this is delayed until 2013 at the earliest – this is assuming it doesn’t get derailed prior to implementation in the same way that the Broadband Tax might (see further below)!

We need more support for UK innovative businesses. We need it now.

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Tax holiday for business start-ups in Ireland

Welcome news if you’re a start-up business in Ireland is that a tax holiday is now granted for the first 3 years of trading.

This tax exemption is only available for start-ups that commenced trading on or after 1 January 2009. The only restriction is that the tax liability otherwise due for each year must not exceed €40,000 – hardly troubling for most start-up companies given that the current prevailing corporation tax rate in Ireland is only 12.5%!

Let’s hope that the UK government are keeping a watching brief…