Interesting timing given that HMRC will not actually provide advance assurance to applicants until the new SEIS tax laws receive formal approval (‘Royal Assent’) – likely in July this year…..
The nature of my accountancy and business advisory work involves words and numbers wrapped around often complex problems.
A business model or problem typically has a myriad of moving interrelated parts (and people). Add to this the jargon that surrounds accountancy and tax legislation and you can frequently see a client’s eyes glaze over beneath a furrowed confused brow as a sea of words envelopes them!
This is where a piece of paper, a flip chart or a post-it note comes into its own – ideally with a nice colourful set of Sharpies!
Some people are more ‘visual’ than others (myself included) although evidence suggests that we are all as humans innately visual. Just to be able to draw a person (stick-man) and a square box (company) and some arrows to show the flow of cash to and from the company and suddenly the client sees where all the cash is disappearing!
Another sketch I find useful to draw is the lifecycle of a business and to discuss with an entrepreneur where they think their business is at its current stage of growth on this chart. From this we can discuss the planning points that are relevant now and in the not too distant future.
Post-it notes are really useful for planning and brainstorming. I find it best to use one idea per post-it note. In this way it is easy to shift the post-it notes around to gain new insights. If there is a team working on a problem then allowing each participant to write ideas on each post-it note and for them all to be stuck up and discussed before they are moved, promoted or eliminated works well. If you can get your hands on some giant post-it notes – all the better!
The downside with the above ‘post-it notes approach’ is that you are still using words albeit on brightly coloured moveable pieces of sticky paper. There is definitely something to it that makes it a more creative and insightful process than say writing linear notes or brainstorming in a discursive way, however, drawing simple sketches on paper (or on a tablet device such as an iPad with an app such as Penultimate) has a merit all of its own.
Every business has its own particular key numbers. Mine has them. Yours has them. But do you know what they are and, if so, how are you measuring them?
If you are seeking to build a sustainable business you must hunker down and look at the numbers. Many business owners despise the thought and try to limit any sort of financial review to the year end but in today’s economic climate this is simply too risky – if you are fortunate enough to make it to your year end, the damage to the financial health of your business by that point may be too severe. You may already be in intensive care (and not even know it)!
I was sitting down with a client of mine last week who has a handle on his numbers. He has the benefit of using an online cloud based accounting solution (Xero) that allows him to drill down into his sales and costs in realtime. This allows us to have a richer conversation about exactly where his business is now and plans for the future.
He has an online business so his key costs are marketing and the salaries of the development team. We talked about his key numbers that are:
- Cash in the bank
- Number of new registrations / expressions of interest / leads
- Cost per new customer acquisition i.e. conversions
- Organic v purchased registrations (purchased mainly comprising Google Pay Per Click)
- Profit margins per service offered
The business is still at a relatively early stage and therefore most of the focus is on customer acquisition and developing the service and therefore this business owner’s key numbers are primarily around lead generation, conversion and then up-selling additional higher margin services.
He has been tinkering with marketing costs (the beauty of Google Pay Per Click is that you can quickly and easily turn the tap on and off) and he knows that his development team is down to its bare bones and that he needs to keep investing in his IT platform to stay ahead of the competition. By his own admission, this business has yet to get fully to grips with relative margins between service lines although we discussed an exercise to get to grips with this sooner rather than later – as he doesn’t want to find 6-12 months down the line that he’s been leaving much needed cash on the table by up-selling the ‘wrong’ services.
We discussed condensing the key business information (beyond what’s available on the Xero dashboard) onto a single page that could be reviewed at least monthly – preferably weekly.
There’s no need to be put off by fancy acronyms like KPIs (Key Performance Indicators) and financial jargon, this is your business (your future) so you need to get a handle on the performance measures that matter so that you can take quick and decisive action if and when the need arises.
I wish my handwriting was neater to make best use of this app but I still find it to be a really useful means of quickly sketching out a diagram to help explain a problem and tease out solutions. In my experience the saying:
“A picture paints a thousand words”
is so true. A quick sketch using symbols and stick men can help depict a problem and allows for more creativity in solving the problem. Penultimate addresses this need beautifully so it is great to see them now joined up with Evernote.
Evernote is a fantastic application and I use it for pretty much everything in terms of a store for information that I might need at some point in the future.
The basic version is free (you can download it here) and it allows you to upload documents, take notes, forward emails, store business cards, recipes, pictures – you name it, it stores it.
The real benefits for me are twofold:
- I can retrieve information quickly and easily by typing into its search-bar as Evernote has the capacity to very cleverly “read” pdf or other format documents to find the text that I am looking for within my account.
- I can access my Evernote account from wherever I am as it is cloud based and therefore synchs across all devices.
If you are looking to go paperless, you could do a lot worse than consider Evernote for this purpose. From a personal perspective, I find this works really well as I can use my Epson SX435W to scan all my personal paperwork directly into my Evernote account – here’s how:
Using a Mac and an Epson scanner / printer you simply:
- Set up an Evernote account and download the free application to your Mac
- Set up the Epson SX435W to synch with your Mac wirelessly – follow the Epson instructions
- Put the paper into the Epson scanner
- Launch “Image Capture” (which comes as standard on most Macs)
- The first time you use Image Capture you will need to select the Epson scanner that it should locate over your wifi connection.
- In Image Capture select the “Scan to” drop down and select “Other”
- Then click on “Applications” in the left-hand bar of the Finder that launches
- Scroll down to find Evernote in Applications
- Job done!
To be able to locate my documents on the move is such a weight off my mind. I know where all of my important documents are and that they’ll be quick to find. I also add web-clippings using Evernote’s extension to Chrome and I can also upload interesting blog posts directly from my preferred RSS reader app (Reeder).
And its not just “boring business / finance related stuff” in which Evernote comes into its own – I also scan in stuff like my kids’ drawings, stories and notes just in case they perish or more likely get lost over time….
- Why Evernote Bought the Best iPad Handwriting App (readwriteweb.com)
The introduction of Seed EIS (SEIS) is a major break-through for early stage companies seeking funding.
Here are 10 need to know (N2K!) facts for start-up founders on the new SEIS scheme:
- SEIS allows investors in early stage companies to receive 50% income tax relief on investments up to £100,000 per year. So for every £1 invested, HM Revenue & Customs will refund 50p regardless of their rate of income tax!
- SEIS investors will pay no capital gains tax on ultimate disposal of their shares so long as the company remains as a qualifying SEIS company for 3 years. So even if your business turns into tomorrow’s Facebook, the investors will not pay a penny in capital gains tax on ultimate exit!
- There is an added bonus for investors between 6 April 2012 – 5 April 2013 in that they can reinvest any gains crystallised in the year and wipe out the gain completely – so say an individual sold a rental property in the year and realised a profit / gain of £100,000 they would normally be liable to pay up to £28,000 capital gains tax. However, they could reinvest this into a SEIS investment instead and receive 50% income tax relief plus eliminate the taxable gain entirely – this equates to a whopping 78% tax relief or, put another way, a 22p in the £1 investment cost…..!
- Your company must have commenced trading within the past two years to qualify for Seed EIS – remember this is aimed at early stage companies only – and must be unquoted (AIM and PLUS listings count as unquoted for these purposes)
- Companies are limited to raising a maximum of £150,000 under SEIS – after this, they may be eligible for SEIS’s Big Brother, EIS, provided 70% of the SEIS cash has been spent (…!)
- To qualify for SEIS, companies must have less than 25 employees and gross assets of £200,000 or less (before the investment round).
- Early indications were that SEIS would apply to loans to startups as well as subscription for shares but the rules as implemented restrict the relief to subscription for ordinary shares only.
- There are material interest limits (30%), certain trades are excluded and there are a fair few stumbling blocks for the unwary as the rules largely mirror EIS.
- You can obtain advance assurance on whether the company is a qualifying SEIS company from HMRC.
- It applies from 6 April 2012. The legislation states that it will run for 5 years so to 5 April 2017 but hopefully it will be extended.
This is a great opportunity for start-up founders to access much needed capital at a time when traditional sources of bank and grant funding are thin on the ground.
Please drop me a line if you would like some assistance in navigating the SEIS or EIS rules either as a company founder or business angel investor.
(Note that the above article (and webinar) pre-dates the recent Budget Statement)
(Updated: July 2019) So you’ve had a good look at the activities of your company and think you might have a qualifying claim for Research and Development (R&D) Tax Credits – but what next?
HMRC R&D tax credits can be successfully claimed by UK companies across all industry sectors – from builders to engineers to manufacturers to technology firms to, of course, R&D companies.
There are 4 key steps to making a successful claim for UK R&D tax credits:
1. Prepare a short report that outlines the nature of the qualifying R&D activities for UK tax purposes
Firstly, breakdown the project(s) work carried out in your company over the past two years into potential qualifying and non-qualifying projects.
Consider which projects you feel pushed the boundaries of knowledge or capability in your field (not just for you as a company).
For example, you may have found yourself at point A in a new project and wanted to get to point B in terms of say, a new or improved product or service but had no idea how to get there? You therefore incurred time and costs engaging competent professionals in your sector seeking to find potential solutions.
You may have hit roadblocks along the way and therefore incurred commercial and financial risk.
Don’t forget that aborted projects can also be included in a claim.
If so, these can all be pointers towards potentially qualifying R&D activities for tax…
You should aim to build your supporting R&D report around four key headings:
- What is the science or technological advance sought?
- What were the scientific or technological uncertainties involved in the project i.e. why was it that standard or commonly accepted approaches or methodologies wouldn’t work in your case?
- How and when were the uncertainties actually overcome? Take us on your development journey. What worked and what didn’t?
- Why was the knowledge being sought not readily deducible by a competent professional in your field? It helps here if you can provide a little info on the background and experience of the team that you had involved in this project.
There are specific HMRC guidelines for claims made by companies in the field of software development including some example case-studies of qualifying projects for R&D tax purposes.
HMRC deals with R&D tax credit claims via its specialist R&D Units.
2. Quantify your R&D tax qualifying costs
Qualifying costs for R&D tax purposes fall within 3 main categories:
(i) Emoluments paid to staff engaged in the qualifying R&D (this covers salary, employer’s NIC and employer’s pension costs).
Make a table (say in excel) listing all of the staff engaged in the R&D project(s) and their total emoluments for the year. Then apply a percentage based on the number of days that they were directly engaged in the R&D project work (v their total working days).
Ideally your team maintain time-sheets but if not, an estimate based on diaries etc will suffice. Total these costs up and this will likely form the bulk of your claim.
(ii) Subcontractors / Externally provided workers – These are third parties that you subcontracted elements of the R&D work to or workers provided by a staff provider e.g. agency, in the latter case.
These relationships can sometimes be quite tricky to classify for R&D tax credits purposes and the paperwork will often be key.
(iii) Software / Consumables can also be included in a claim.
These will typically be off-the-shelf software that you had to buy to use within the R&D process (e.g. software licences).
Or bits of consumable kit or parts if you are developing physical products or prototypes. Really anything that is used up as part of the process or discarded.
Any capital expenditure e.g. on PCs bought for the process, are not likely to be consumables for these purposes; rather these would attract 100% tax write off under the R&D scheme (if not already securing 100% writing down allowances under the normal Annual Investment Allowance available to all companies).
A percentage of your power and water costs can also be claimed.
The total of the above costs will form the basis for your claim.
3. Apply the R&D tax uplift or enhancement to the total of the costs to calculate your R&D claim.
The enhancements set out below apply for UK SMEs which will cover the majority of readers of this site as the SME thresholds for R&D are huge (less than 500 employees and either turnover of less than €100m or a balance sheet total of less than €86m).
From 1 April 2015, the enhancement is 230% on qualifying costs.
So say your total qualifying costs (from points 1-3 above) in your financial accounting period ended 31 March 2019 are £150,000, then under this R&D tax incentive you will receive an additional £195,000 deduction against your taxable profits for the year. This is for company corporation tax purposes only i.e. it is a ‘notional’ tax deduction only that does not reduce your profits for accounts purposes.
This means that you have less profits subject to corporation tax so it reduces your bill.
Taking this a step further, say your adjusted taxable profits (but pre-R&D enhanced deduction) are £125,000, then this additional R&D adjustment will turn an otherwise likely corporation tax bill of £23,750 into a tax loss of £70,000. Not only does this eliminate the c£24k tax bill, but it potentially results in a tax credit rebate of £10,150 from HMRC (at 14.5%)!
Now you can hopefully see the value of investing some time to pull together an R&D tax credit claim!
You can go back to accounting periods ended in the past two years to make or amend claims – so its not too late to revisit and amend previously filed corporation tax returns.
4. How to file the R&D tax credits claim with HMRC
The R&D tax credit claim is included in your corporation tax return for the relevant accounting period. Corporation tax returns are filed online. Your R&D report and accompanying calculations can be filed online via the HMRC filing portal. They will be passed internally to the relevant HMRC R&D Unit for processing.
HMRC aims to process all R&D tax credit claims within 28 days of filing.
Getting the best R&D tax result for you
There is more work to be done before your R&D tax claim is filed with HMRC. This work is to determine the optimum treatment of the claim for your specific circumstances.
For example, rather than reclaim the cash tax credit at 14.5%, it may work out better for you to carry a resulting loss back to the previous profitable accounting period. Or carry forward to future periods if you expect to return to profitability quickly.
This is because the net cash recovery might be higher than simply claiming the in year tax credit.
You can attempt to make a claim yourself or you could try using HMRC’s new R&D pilot programme although you may find you achieve a better result by seeking some professional help from R&D tax credits specialists.
Either way, I hope that the above is helpful and we see more R&D claims being filed by UK companies!
You can find a more detailed R&D Tax Credit Guide at our sister site: IP Tax Solutions.
10 tax tips for fast growth companies
The seminar is pitched at companies from startups through to more established companies as we walk them through the sorts of tax issues and opportunities they should consider as they seek to grow profitable companies.
We will be holding the event at Manchester Science Park (MSP) Innovation Centre in Salford and a key focus will be on cash preservation which is a key issue for growing companies – as cash is the lifeblood of every successful business.
The sorts of issues we will cover include:
- Pros and cons for founders in funding their companies via share subscription v loan
- How to attract business angel investors and take advantage of investment tax relief like EIS and the forthcoming Seed EIS
- Why paying key staff salaries and bonuses is expensive and a better more cost effective all-round solution
- How a potentially lucrative tax incentive might benefit your company and how HM Revenue & Customs (HMRC) might even pay you for the privilege of claiming it!
- How to pay yourself tax efficiently
- Heads up on a new tax incentive that is on the horizon and could save your company £££s in tax if you get your ducks in a row now
- A simple way for start-ups to slash your employee wage bill
- How VAT could actually make you some money!
- How you could save a theoretical £1.8m if you are growing your business for sale in the near future
We will run through these points over lunch today and it would be great to see you there. The event is free. Yup, free.
Happy to run this event elsewhere or online vian a webinar if this is of interest.
- EIS Funding Catch (businessn2k.com)
- Tax relief boost for ‘armchair’ investors in small firms (telegraph.co.uk)
- Investing in Startups – For Entrepreneurs and Angel Investors (jamesbayley.com)
I’m here at the latest instalment of Techcelerate’s series of events for tech and digital startups in the Manchester and NW area.
Martin Bryant, Managing Editor of ReadWriteWeb, kicked off the evening with an extension to his recent TEDx Manchester talk on getting traction in the tech scene in Manchester. Having visited various tech hubs across the UK and the vibrant European start up scene, Martin was left wondering:
“With the strong sense of industrial history in Manchester, why don’t we have a vibrant startup tech scene here?”
Martyn set up a Facebook group to glean views and followed up with a blog post to further stoke interest. Feedback affirmed his initial prognosis – support networks are fragmented and disparate. Lots of startups want help but don’t know where to go.
A lively debate ensued with much consensus around the view that there are plenty of success stories that have emanated from Manchester e.g Laterooms. Its just that new and more established tech businesses circulating at the moment get very little air time (than they might in say London or across the European startup scene).
My own view is that we need a hub. In fact I think we need two. One physical and one virtual.
First, we need a physical venue where startups can congregate, work, collaborate, share ideas, whine, celebrate and work through all the pleasure and pains that go into building a business. Manoj Ranaweera has done a great job in setting up Techcelerate and the Tech centre in Manchester city centre (where I am right now for this event). Madlab is also a great initiative too.
A question I am grappling with is whether it should really be for startups to lead in terms of establishing where they want to congregate. I don’t think this can be led (although Daresbury, the Sharp Project and perhaps the Tech centre may disprove this!). To me, a hub needs to grow organically to have a real chance of success. An example might be where a business grows fast, becoming successful and then opens its doors to new fledging startups who wish to congregate around the buzz. From there a hub can grow.
Secondly, I think we need much more online air-time to sing the praises of our early stage startups and growing businesses. To profile them. Highlight events. Provide a platform for the businesses to showcase their products, ideas and solutions. I suppose a Techcrunch but specially targeted at Manchester and the NW. (I would be happy to toss my hat into the ring to assist with this).
As Martyn noted, it feels like we are on the brink of something exciting that is about to explode in Manchester. What are your views on what needs to happen to support tomorrow’s businesses in Manchester?
Whilst Stephen Hester, chief exec of RBS, did the right thing and waived his entitlement to his £1m bonus, how would you like the opportunity to reward your key employees with the potential for significant future windfalls without any flack (in fact, more likely with a whole heap of praise from your happy employees!)?
Mr Hester’s ‘bonus’ was actually in the form of a share option rather than cash. So he was entitled to acquire shares in RBS at a fixed price in the future – at which time the expectation (hope!) was that the shares would be worth a whole lot more – giving him a potentially significant cash windfall when he sold the shares at their then market price.
Share options aren’t limited to listed companies. They can also be used for private limited companies. Like yours.
The key advantages of share option schemes are:
- You are passing a potentially hugely valuable ‘bonus’ to your employees with no cash outlay for your company – it is put simply a piece of paper with a right to acquire the shares in the future
- Key employees can be tied-in to the company as the share option scheme can specify at what point the options can be exercised and the shares acquired e.g. 2,3 or say 5 years from the date of grant or, very commonly in fast growth SMEs, only on a sale of the company to a third party or a floatation on the stock exchange (an ‘exit only’ scheme)
- There can be significant tax savings for the company and the employees if structured right in granting share options compared to paying cash bonuses (especially if you qualify for the EMI option scheme).
The Patent Box lands in the UK on 1 April 2013 as part of the government’s bid to make the UK a more attractive and globally competitive place to do business.
I won’t dish out the detail of the patent box right now suffice to say that it will provide a lower rate of UK corporation tax for patent income (10%). The main rate of corporation tax is currently 26% and will be 24% at the time of the introduction of this new relief.
The patent box is not new – other countries have successfully piloted similar schemes (some EU countries with more attractive patent box rates than our proposed rate) and now the US is taking a serious look.
We already have the R&D tax credit in the UK to reward companies engaged in pushing the envelope of knowledge in the areas of science and technology although some 12 years post intro there are still many companies that are struggling to get to grips with this increasingly attractive tax incentive and many who have yet to make a claim (much to my frustration!).
HMRC recently held a meeting outlining the new patent box relief (slides here). I am not the only one left thinking that once companies have gone to the hassle of calculating the profits attributable to this lower rate, there may not be much eligible for the special 10% tax rate!
This is a good initiative but yet again the implementation of this tax incentive leaves a headache for companies and their advisors. What are your thoughts on what you’ve seen so far?
- Patent tax relaxed for smaller companies (telegraph.co.uk)