CGT

Curve smashes crowdfunding target on CrowdCube

Amazing result from the guys at Curve in raising their target £1m fund-raise in FOUR MINUTES (!) and hitting £6m within five hours…

Seriously!?! A truly phenomenal result for the team there and, to be fair, it’s a great product (as I’ve already got a card myself and love it!).

Anyhow, most startups are not going to see these sorts of results and we shouldn’t lose sight of how far along these guys were already in their growth plans. See the video for more.

Using SEIS / EIS to boost funding

For most UK startup founders, they shouldn’t lose sight of the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) to help attract and boost funding.

These are attractive tax incentives that benefit the investors directly (in income tax and capital gains tax reliefs) and you as the founder indirectly (as the investors should be more willing to invest in your company).

Unfortunately, the rules around SEIS/EIS can be complex so please reach out for help.

Read more from Curve:
https://discover.curve.app/a/fintech-curve-smashes-crowdfunding-target

Link to Crowdcube fundraising page:
https://www.crowdcube.com/companies/curve/pitches/Z1n3gb

Emergency Budget 2010: What it means for fast growth technology businesses

There was mixed news for fast growth technology and digital businesses in today’s Emergency Budget. Headlines were as follows:

Corporation tax rates will be cut from 21% to 20% for small companies ie those with taxable profits up to £300,000, with effect from 1 April 2011. Large companies will benefit from tax rate cuts from 28% to 27% in 2011 and a 1% decrease each year to 24% in 2015. A hugely competitive rate.

Capital gains tax for entrepreneurs was actually enhanced with the 10% effective CGT rate preserved under Entrepreneurs’ Relief and the lifetime allowance increased from £2m to £5m. It was disappointing that more was not done to extend the benefits of Entrepreneurs Relief to employees holding share options, many of whom will be taking a career risk sticking with fledgling startups (rather than taking ‘safer’ jobs) so they deserve to be rewarded like the founder shareholders.

New start ups in the north west will benefit from a national insurance contributions holiday for the first year of trading for the first ten employees. The scheme will run for 3 years and could save businesses up to £50,000. It will kick off in September this year but businesses started in the interim may qualify.

Capital allowances will be reduced to fund the above corporation tax rate with the Annual Investment Allowance for investment in say computer equipment and office furniture reduced from £100,000 to £25,000 from April 2012. There are further reductions for investment in fixed assets so businesses should seek to accelerate planned capital spend before April 2012 when the changes take effect.

VAT increases from 17.5% to 20% from 4 January 2011 should have minimal effect on most B2B businesses as the increased VAT rates should wash through in most cases. B2C businesses will be hit next year although a 20% VAT rate remains competitive globally.

R&D tax credits will be preserved which is great news and a review will take place in line with the Dyson review which may enhance the relief. Disappointingly the planned video gaming relief will be withdrawn – why this is the case is baffling to me as the video games industry is one in which we already have a competitive advantage and the likes of Canada already have such tax breaks.

A Regional Growth fund along with pressure on banks to lend to SMEs should assist in ensuring that businesses have much needed access to funding.

Overall, the Emergency Budget was positive for businesses with a clear plan for growth and stability over the next 5 years.

What’s your view?

Emergency Budget Wishes 2010

Letter to George Osborne MP regarding my wishes for next Tuesday’s Emergency Budget Speech:

Dear Mr Osborne MP,

Emergency Budget 2010

I appreciate that you have an extremely difficult job next Tuesday 22 June 2010 in delivering a Budget Report that seeks not only to balance the books over the longer term but to also avoid derailing any possible chance of an economic recovery in the UK in the short to medium term. No mean feat!

I ask that you place support for Enterprise and Business at the centre of your plans. In my view, this represents the only fighting chance we have of preserving jobs – so that people can keep on saving and spending – whilst generating profits and economic growth to keep the till ringing at the Exchequer with tax receipts for years to come (and so pay down our monstrous public deficit).

Central to this approach must be a “sleeves rolled-up” desire to discard with red-tape, bureaucracy and other hurdles to businesses getting on “with doing business” aligned with a clear vision and road-map of the UK as a great place to do business. This must be a long term plan backed with long term measures. No short term chopping and changing – we’ve had enough of this of late – as businesses want “certainty” so that they can plan for the future with the confidence that the rug will not be pulled out from under their feet anytime soon. (As an advisor, I agree that this would be nice too).

You have already set out in your coalition agreement that you will increase the rate of capital gains tax for individuals, however, I ask that you stick to your pledge to retain more attractive rates for investment in business assets and avoid implementing any cumbersome taper relief measures that cause wide-spread head-scratching. Keep it simple. In a similar vein, I ask that you withdraw the hideously complex restrictions on tax relief on pension contributions made by higher earners so that people can save for their retirement without having to navigate this minefield.

You have also expressed a wish to simplify corporation tax to make the UK one of the most competitive tax systems in the world. I wholeheartedly agree with this lofty goal but ask that you refrain from withdrawing tax incentives that have helped influence longer term business planning in a positive way such as R&D tax credits, enhanced capital allowances and the forthcoming patent income and gaming relief tax breaks. The UK’s highly successful entrepreneur and inventor, James Dyson, has called for the R&D tax credit to be retained and enhanced – although I question whether the relief should be aimed solely toward particular high tech sectors as Dyson suggests. Further, a recent report by NESTA points to recent findings that the fastest growing 6% of businesses generated 1/2 of the jobs created in the UK between 2002 – 2008 – what these companies had in common was a disproportionate tendency to be innovativeWe have the expertise to build innovative intellectual property rich businesses that become key exporters bringing cash into our country and you should seize this opportunity by demonstrating commitment via targeted tax incentives such as those noted above.

Capital allowances should continue to be used as a lever to encourage ‘greener’ investment and I would also like to see the Government implement tax-advantaged status for specific business parks or zones to encourage inward and internal investment in businesses spread across the UK. The increasing prominence and differential of London as a business centre compared to the rest of the UK regions needs recalibrating and such measures could help. This could also lead to much needed job opportunities in areas of high unemployment – particularly where painful planned public sector jobs cuts are implemented.

Given the substantial revenue raising potential of an increase in VAT rates, I can understand why this is likely to be a target for change. Most B2B businesses would suffer minimally from such an increase as they would pass on the cost in most cases, however, please be mindful of the pain likely to be suffered by UK retailers and customers alike. I would also ask that any planned phased increases take account of the administrative and labour costs of changing prices for each uplift and its timing (e.g. not over the Christmas busy season like your predecessors implemented please), if such an approach is ultimately planned.

Other matters I would like to see addressed include: no drastic cuts to the HMRC Time to Pay Arrangement which so many businesses have been relying on to spread their tax bills whilst the banks have been less willing to lend; a withdrawal of the planned 1% increase in Employer’s National Insurance contributions and some practical, workable solutions for married / civil couples to split their personal income tax allowances.

The above is just a handful of the sorts of changes I would like to see but my overall plea is that a long-term business friendly strategy is adopted that opens the door for new business start-ups, increased overseas inward investment and a supportive tax and business regime that gives every promising UK business a chance to flourish.

Please let me know if you have any questions.

Best wishes and good luck for next Tuesday.

Yours sincerely

Steve Livingston

Have I missed anything?

Tax measures in the coalition government agreement – what might they mean for you?

  • Personal allowance to be increased to help lower and middle income earners. The Coalition has agreed that there will be a substantial increase in the personal allowance from April 2011. The amount for those under 65 is currently £6,475.
  • The increase in the Employers’ National Insurance thresholds proposed by the Conservatives will go ahead, reducing the impact of the rate rise for employers. But the rise in the rate for employees of 1% from April 2011 introduced by the Labour government is expected to remain.
  • In the long-term the intention is that the personal allowance will be £10,000. This will be reached over several years.
  • The increase in the personal allowance is to take priority over cuts to Inheritance tax. The Conservatives in their manifesto stated that they wanted to increase the Inheritance Tax threshold to £1 million. The Liberal Democrats were against this, saying it would only benefit a minority.
  • The Conservative party wanted the personal allowance to be transferable between married couples. The Liberal Democrats have been given the opportunity to abstain from voting on resolutions on this matter which may arise in the Budget.
  • The two parties are looking at taxing non-business capital gains at rates similar or close to income tax rates, with exemptions for entrepreneurial business activities. The current rate is 18%, so a jump to 40% is more than double and some could face CGT at the new higher rate of 50%.
  • In addition, it is rumoured that the tax-free amount for capital gains before any tax is payable may be cut from £10,100. The Telegraph was suggesting the new tax-free amount would be £2,000.
  • There is speculation that the rate of VAT will increase from 17.5% to 20% to fund the tax breaks.
  • It was said in the Agreement that the earnings link for the basic state pension would be restored from April 2011 with a ‘triple guarantee’ that pensions would rise by the higher of earnings, prices or 2.5%.
  • The parties agreed that reductions could be made to the Child Trust Fund and tax credits for higher earners.
  • The Conservative party said that Stamp Duty Land Tax would be scrapped indefinitely for purchases up to £250,000 by first-time buyers.
  • The Home Information Packs are to be scrapped but energy performance certificates will still be required.
  • The coalition has agreed to end the rules which make it compulsory to buy an annuity on reaching 75.
  • The Liberal Democrats said that they would give only basic rate relief on pension contributions. The Conservatives did not give any promises on pensions’ tax relief.
  • On corporation tax the Agreement is silent. However the Conservative manifesto states the intention to cut the main rate of corporation tax to 25p (from 28p) and the small companies’ rate to 20p (from 21p). This is to be funded by reducing complex reliefs and allowances [we should hear more on this in tonight’s CBI speech given by the Chancellor, George Osborne.]

What might this mean for you?

There are fears that some of the changes (e.g. the capital gains tax (CGT) hike) will be introduced with effect from the Emergency Budget Day (22 June 2010) – changes to CGT are usually left until 6 April of the following tax year but it could be that this will not happen in this case :(

Action:

You should review whether any non-business assets that you own (e.g. listed shares – not AIM) stand at an unrealised gain and therefore whether they could be sold before 22 June 2010. The shares could be re-purchased by a spouse the same day e.g. if they are a long term investment (you can’t repurchase the shares yourself until 30 days after selling them). Alternatively, you could consider selling into an ISA if you’ve yet to max out your £10,200 allowance for the 2010/11 tax year.

Second properties are more difficult to plan for as even if they stand at a current unrealised gain (doubtful in most cases!), the chances of offloading for a decent price pre-22 June 2010 is minimal, without risking taking a huge cut in price (which kinda defeats the object if the loss suffered outweighs the tax saving!). There is more complex tax planning that can be undertaken to overcome this practical issue with professional advice (from the likes of us).

Other areas at risk:

  • Higher rate relief on pensions could be withdrawn and replaced with basic rate tax relief for all.
  • Higher rate tax relief on Gift Aid payments.
  • Capital allowances….?

The above is based largely on speculation and could be proved wildly incorrect come 22 June 2010. Take professional advice specific to your circumstances before you take the plunge and do anything you weren’t otherwise planning to do in advance of the Budget Day – you shouldn’t allow tax to drive your investment decisions in any case. You have been warned…

Should I set up a Limited company for my new start-up?

Most business start-ups tend to opt for setting themselves up as a limited company from day one – but is this right?

Answer: It depends.

In many cases, a limited company is the right option but it pays to think through all the options as there can be benefits to thinking a little differently.

You basically have 3 main choices in the UK:

  1. Company
  2. Partnership
  3. Sole trader

The main advantage of a limited company is the limited liability status. This means that the company’s liability to a claim made by say an aggrieved supplier is limited to the share capital of the company. So if the company is set up with £1 share capital – that’s the extent of its liability. Hardly worth pursuing so the shareholders can sleep at night.

Limited liability status is not only important to protect the livelihood of the company owners but it is also useful for protecting valuable assets like trademarks, patents, know-how and other intangible assets.

But a company is not the only business vehicle that can attract limited liability status. Partnerships can also now attract limited liability status as an LLP (Limited Liability Partnership).

Why consider setting up an LLP over a company?

The key issue is flexibility. LLPs are more flexible than companies, particularly in relation to tax planning.

Consider the example of Jane & Freddy. J & F are starting a digital advertising agency. Rather than opting for the typical default option of a limited company, they set up an LLP at Companies House. J & F are partners in the LLP rather than shareholders and directors of a company. J & F pay income tax under Self Assessment rather than PAYE. They don’t pay any income tax until 31 January in the year following the coming 5 April tax year end. So they can diligently set aside this tax and keep it stashed in say a high interest cash ISA or bank account until it is due to be paid to HMRC. This compares with paying tax over monthly under PAYE.

But it gets better. There is no Employer’s National Insurance (currently 12.8% – potentially set to increase to 13.8% from 5 April 2011) on partners’ income from the LLP. Plus partners(and sole traders) are subject to Class 2 and 4 National Insurance which is more favourable than company Class 1 National Insurance. If they have taxable benefits such as company cars then there is also more favourable tax treatment in an LLP than in a company.

And yes…. it gets even better. After 2 or 3 years of successful trading, J & F may decide to incorporate their LLP and turn it into a company. (This might particularly be the case if they feel they have reached the stage where they need external investor funding in return for shares in their company.) The digital advertising agency business and its assets (e.g. computers, cash in the bank etc) would be transferred to the newly formed company at market value. This would crystallise a capital gain based on the market value of the business – however, this tax can be deferred.

The market value of the LLP business would be measured not only on the tangible assets transferred but also more interestingly on the intangible elements of the business, particularly goodwill (which may account for most of the value in the business). Goodwill is made up of the value in the brand, the customer base, its future potential etc built up over the past 2 or 3 years of trading – the factors that would influence a willing hypothetical purchaser to pay over and above the value of the visible tangible assets.

Post transfer, J & F Ltd would be the proud owner of the digital agency business and assets. The goodwill element would attract valuable tax relief in the company. Also, in return for the value transferred in, the company would have a debt owed to J & F as LLP vendors and now shareholders. This creates a highly valuable and flexible tax-free balance that can be drawn down as and when needed by J & F. Combined with a carefully managed remuneration extraction strategy from the company, J & F will have added considerable after tax value to their business which they can enjoy now compared to if they had followed the herd and set up as a company from day one – all by thinking a little bit differently.

The purpose of this short article is to emphasis that there are alternatives to setting up a company for a new business venture. It is oversimplified and the key benefits and principles may change (e.g. in light of the imminent emergency budget!) so, as ever, please take professional advice specific to your circumstances.