How to give your key employees a Hester bonus (without the flack!)

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).
I am currently working with a number of clients to implement share option schemes, especially at a time when share valuations are low and cash is tight in the current economic climate.
Ping me an email (my contact details are in the sidebar) if you would like to discuss this further for your company.
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Ticking the UK patent box

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?

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EIS Funding Catch

A key requirement of EIS (Enterprise Investment Scheme) relief is that the funds invested are ’employed’ within the investee business within the requisite time. The current requirement is that 100% of the funds must be invested within 2 years in the qualifying trade.

But how can a company ensure that it can demonstrate that it has fulfilled this requirement?

It is commonly advised that companies maintain a separate bank account for the EIS funds received. This way the company can maintain a record of both the timing and nature of the expenditure to which the EIS funds have been employed. There has never been a problem with EIS funds being used for working capital requirements – in fact, advisers have often recommended that funds be utilised for working capital requirements in priority to other funds if there was a risk that the funds might not otherwise be invested in time – however, a recent court case has added a layer of complexity to this commonly accepted advice.

The recent Skye Inns case was decided against the taxpayer on the grounds that a proportion of the funds was not invested within the required time limit. This was despite the fact that a separate bank account was maintained. The company was faced with a difficult decision in that a particular investment fell through shortly before the time limit for investment of the EIS funds was set to expire. The company therefore tried to argue that the funds had (largely) been utilised in servicing working capital demands instead. The appeal court decided, however, that the ongoing trading income of the investee business should be considered for servicing working capital in priority to any EIS funds. On this basis, HM Revenue & Customs won the appeal and the EIS relief was denied for the taxpayer.

It is key therefore that EIS subscription monies are earmarked in the relevant period for a specific current or future trading requirement rather than simply dipping into the EIS account, as necessary, and relying on a first in / first out (FIFO) basis to favour EIS funds over subsequent trading income. As ever, the paper trail will be key in ensuring that relief is not denied.

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HMRC offers R&D tax credit help for small companies

HMRC has announced today a pilot scheme to assist small companies in making their first Research and Development (R&D) tax credit claim.

Small companies for these purposes are companies with fewer than 50 employees – so still fairly sizeable in actual fact.

The idea is that participants will be allocated an R&D tax contact from HMRC who will assist the company in putting together a claim and agree a basis for the next two years’ claims provided that they follow the same basis.

This is great news for small companies or startups who would like advance assurance before commencing work in compiling and filing an R&D claim, however, we’ll have to see how this works in practice. For example, in terms of

  • is there sufficient HMRC resource to commit to individual company claims (they are already stretched); and
  • I hate to be cynical but there has to be a question mark over HMRC’s incentive to help companies maximise claims or explore angles or more obscure claims that might not be immediately apparent.

The sorts of issues and technical matters that you would hope your accountant or tax advisor is already doing for you.

Pitching for Management – Manchester – 12 October 2011

Do you want to take your business onto its next stage of growth? Do you need to find some senior talent to help you do this?

We are partnering with AngelNews for its latest Pitching for Management event in Manchester on 12th October. This will be the perfect event for exciting businesses to find senior people to help them build their teams at no cash cost and for executives to identify interesting early stage businesses that would value their expertise.

Pitching for Management is a live event series which runs in 18 cities across the UK. It will be held at Brown Shipley’s offices in Spinningfields from 4.00pm to 7.30pm. As well as the pitches there are plenty of networking opportunities at the event and canapés and drinks will be served during the evening.

The Pitching for Management concept is simple. Make a short pitch to an audience of senior executives who have come to see if they can offer their services to help you.

These executives are willing to work for sweat equity, bonuses, commissions and/or share options. So pitching companies do not need to pay high salaries until they are delivering the results you require.

You can read all about Pitching for Management at www.pitching4management.com.

We are expecting between 30 – 50 relevant senior executives will attend the event. Past events in the series have shown that pitching companies have a good chance of finding someone that suits.

AngelNews is holding a competition for the best pitch of this series of Pitching for Management. The winning pitch at the Manchester event will go through to the final in Bristol on 13th December. The winner of the final will receive a £2,000 cheque.

To find out more about this opportunity, please call Caroline Sage at AngelNews on 01761 452 248 or email her on caroline[at]angelnews.co[dot]uk or contact me.

You can find booking details here.

Hopefully see you there!

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EIS & EMI – Happy marriage or grounds for divorce?

Incentivising key employees by giving them an equity interest in the company not only makes sense from a motivational and employee retention perspective but it also makes good financial sense when cash is tight and tax can bite nastily on cash bonuses.

Many UK growing companies will qualify for the Enterprise Management Incentive Scheme (commonly referred to as EMI) which is a tax favoured share option scheme which allows qualifying companies to allow selected employees to share in the success of the company, perhaps on an exit.

Growing companies that qualify for EMI may also qualify for EIS (a similarly confusing tax acronym which stands for Enterprise Investment Scheme!). EIS is a tax break available to business angel investors in the sorts of growth companies typically favoured by EMI share option schemes.

There is normally no problem in a company acquring funding under EIS whilst incentivising key management or employees using EMI, however, one crucial point to watch is that EIS is only available in respect of new ordinary shares which do not carry preferential rights.  Care must therefore be taken to ensure that shares issued under an EMI scheme do not contain restrictions that might, by default, make the EIS shares preferential within the three year EIS qualifying period. If the the ordinary shares issued to the EIS business angel investors “become” preferred to the shares over which the EMI options are granted within the 3 year period then EIS status could be lost along with the tax breaks that go with it.

Ouch.

Although both EIS and EMI can form a happy marriage for most fast growing entreprenerial companies, they both contain strict conditions that must be adhered to if you are to avoid a potentially unsavoury divorce from your investors.

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R&D tax credit “production” confusion!

There has been this ongoing problem for companies that are solving technological or scientific uncertainties (and therefore,on the face of it, qualify for research & development enhanced tax relief) yet the product that emanates from this R&D process is ultimately sold to a customer e.g. a prototype that is sold rather than skipped.

HMRC’s view has been that if the product was sold it must represent excluded “production” activities rather than a qualifying R&D process and therefore cannot be qualifying expenditure.

The thinking here is that the R&D tax credit exists to encourage investment in the advancement of scientific or technological knowledge where there is no alternative market driver so, on the flip-side, if there are customers willing to purchase the fruits of your labour then why do you need the tax credits? But this analysis does not stand up to economic scrutiny for 99% of SMEs; in that you may not have known how to achieve what you ultimately created but, if you are successful, why on earth would you want to dump your invention or prototype in the skip if there happens to be a willing buyer?!!

The good news is that recent HMRC guidance has softened this approach. It is not a complete reversal of policy but rather an acceptance that there may be instances where costs of developing products do qualify for the R&D tax relief despite ultimate sale.

A key takeaway from this will be the heightened need for appropriate documentation to evidence when the qualifying R&D ceased and excluded “production” activities commenced.

An improvement to this tricky area – yes – but does this go far enough? How might this impact on your company’s R&D activities and future potential claims?

Don’t forget National Insurance (NIC) holidays for business startups

The National Insurance numbercard issued by th...

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If your UK business start-up was set up on or after 22 June 2010 then you may be eligible for a 12 month holiday from employer’s national insurance contributions – normally payable at a rate of 13.8% on employees’ and directors salaries in most cases.

This incentive, aimed at boosting the number of business startups in certain areas (like the north west), has been around for over a year now but many new businesses still seem to overlook it.

We are busy saving new businesses up to £50,000 so it is well worth looking into further if you think it might apply to your new business. Drop me a line if you would like to enroll for this NIC holiday or if you would like to ask any specific questions.

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The Don’t Be a Banker scholarship!

We were busy running off a grant report for one of our tech startups when we stumbled across this inspired scholarship opportunity from Mint digital:

“The Don’t Be a Banker Scholarship – £4,000 – aimed at steering talented graduates away from a career in banking”

I originally thought it must be some kind of joke but its for real. What a fantastic idea!

The blurb states that the grant is also available for those graduates seeking to join large consulting firms so perhaps, if this had been released earlier, it could have “saved me from myself” too…..

Bad news: I understand the timelimit for applications has closed. Boo hoo