Enterprise Investment Scheme

10 tax tips for fast growth companies seminar

I am looking forward to co-hosting a seminar at lunch-time today on:

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.

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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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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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Budget 2011 supports digital, technology and creative businesses (mostly!)

Yesterday’s Budget speech provided largely good news for entrepreneurs in the digital, technology and creative sectors.

George Osborne had promised an “unashamedly” pro-business, pro-growth and pro-aspiration Budget and, although it might be over-flattering to suggest that he achieved this, he certainly made some positive inroads toward addressing some of the roadblocks facing early-stage startups and fast growth companies.

  1. The headline grabber was that the UK is set to have one of the lowest company (corporation) tax rates in the G7. To achieve this Osborne accelerated the previously promised rate cut by introducing a 26% standard rate from 1 April 2011. This will be followed by a series of 1% cuts until it reaches 23% by 2014. This is a further 1% cut to what we were expecting.  Good news if you’re a big company but of little consequence if you’re a startup or SME – as the standard rate only applies for single companies with taxable profits over £1.5m. Unfortunately there was no 2% cut for the small companies rate that applies for most startups and SMEs – the rate will be 20% from 1 April 2011 as previously promised. Still, 20% isn’t bad and if you’ve yet to incorporate your business into a company, it may well be worth crunching the number to see if tax savings could be made.
  2. R&D tax credits get a whole lot better – Research and Development Tax Credits are a key tax incentive for many companies in the tech and wider sectors so it was great news to see Dyson’s recommendations followed and in fact improved upon. Most startups and fast growth companies are already entitled to claim a further 75p tax deduction for every £1 they spend on qualifying R&D activities (primarily comprising relevant staff salary costs), however, it was announced that from 1 April 2011 companies can claim an additional £1 tax deduction for every £1 spent (i.e. a 200% tax deduction) and this set to go up to £1.25 for every £1 spent from 1 April 2012! There are also plans to remove the requirement for the company to have generated sufficient PAYE to cover the cash repayment, a requirement that has been a key roadblock for many companies, particularly start-ups, in making repayment claims. How many companies have significant PAYE bills in the early stages? Not many. There are also plans to abolish the de minimis limit of £10,000 qualifying R&D spend before you can make an R&D tax claim. These changes should open the doors to more companies being able to access cash at an earlier stage than was previously possible. All good news and if you haven’t looked at this for your business, please drop me a line.
  3. Entrepreneur’s Relief lifetime allowance doubled from £5m to £10m for sales after 5 April 2011. For all the blood, sweat and tears put into building your business it is encouraging to know that you will be able to shelter £10m of your gain at a tax rate of just 10% – that’s a potential £1.8m tax saving compared to applying the general CGT rate. I would have liked to have seen a relaxation in the qualifying criteria to assist employees with less than 5% shareholdings, but still, in theory, it will be possible to shelter gains of £200m at just 10% if structured correctly. Mouth-watering huh? At the very least, it is important that you ensure that you are maximising this relief by allocating shareholdings at the optimum levels although care must be taken as there are many pitfalls for the unwary – remember, there is potentially £1.8m of tax at stake….(a subject for another post – or drop me a line).
  4. Enterprise Investment Scheme (EIS) is made much more attractive for investors in startups and fast growth companies. Accessing funding for business has been tough of late and we are increasingly seeing the private business angel networks as well as family and friends stepping into the fray to lend financial support where possible. EIS allows investors in qualifying businesses to obtain income tax relief as well as capital gains savings in relation to investments in startups and fast growth companies. The income tax relief will be increased from 20% to 30% from 6 April 2011 and we will see further sweeping changes in 2012 to increase the amount that can be invested and the breadth and scope of the relief.
  5. The ‘Patent Box’ is on its way! As previously announced, the UK will be following other countries in introducing a lower rate of corporation tax (10%) for patent income to encourage investment in new technologies and methodologies. Although likely to be of most interest to life science and pharma companies, it will be worth keeping an eye on this relief as more details emerge in readiness for its introduction from 1 April 2013 to see if it can be applied to tech companies more generally. As currently drafted, the rules will be too restrictive for most tech companies as few derive significant income from patents but I am hopeful that there will be a widening of scope to catch broader intellectual property classes as it undergoes consultation.
  6. 21 Enterprise Zones to be introduced (including in Greater Manchester and Liverpool) and £100m investment in Life Sciences and Technology with £10m to be invested in Daresbury Innovation Park. Creating clusters of innovative businesses builds support networks and knowledge transfer leading to fast growth businesses. A win-win.

These were the headline announcements relevant to digital, technology and creative businesses – we await the draft legislation which may throw up some anomalies or slight tweaks and I’ll keep you all posted.

Please drop me a line via the contact form on the about me page or my email address is in the sidebar – otherwise, please air your views below.

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Budget 2011 wishes for fast growth digital and tech companies

With George Osborne promising an “unashamedly pro-growth, pro-enterprise and pro-aspiration” Budget tomorrow at 12.30pm, I am looking forward to hearing these words turn into solid, workable solutions for UK entrepreneurs.

Giving Budget predictions is almost as much fun as delving into the actual Budget announcements afterward so please allow me to indulge myself for just two minutes!

Here are the tax changes I would like to hear announced tomorrow:

  1. An increase in the enhanced R&D tax credit deduction from 175% to 200%. I’ve seen so much benefit brought to hi-tech companies from the UK R&D tax incentives but I still see a ‘brain-drain’ in talented technical or scientific entrepreneurs and workers leaving the UK to build businesses where more attractive tax breaks are on offer. Dyson has called for similar changes and we should act now to encourage and retain these export-rich companies.
  2. Introduction of specific tax reliefs for video-game companies. TIGA has been calling for such changes for a while and despite squeaks of support from the previous Chancellor, these plans got shelved by the Coalition government. Canada, South Korea and France are busy supporting their games developer industry so we should likewise support our £1bn UK videogames industry.
  3. A reduction in the 5% shareholding requirement in order for entrepreneur’s relief to be available. Company employees are rarely offered the opportunity to acquire shareholdings of 5%+ let alone have the financial capacity to fund share acquisitions of this quantum so it seems harsh for them to be taxed at a likely 28% tax rate whilst those with a small percentage more could get down to a tax rate of just 10%.
  4. A change in the EMI rules to allow for the 12 month shareholding clock to start ticking from the date of grant of the option – in the same way as the old taper relief rules allowed for the clock to start ticking from the date of grant – for the purposes of entrepreneur’s relief.
  5. Relaxation of the Enterprise Investment Scheme (EIS) rules to allow income tax relief for loans to smaller companies given that accessing lending from banks continues to be difficult – especially for early stage start up companies.
  6. Introduction of the ‘patent box’ for intellectual property income – other EU countries already offer this tax incentive. We need it sooner rather than later.
  7. Enterprise zones to encourage clusters of hi-tech businesses. Mini-Silicon-Valleys with tax breaks for qualifying companies operating within the EZs.

So these are my starter for 7. What have I missed? What measures, incentives or changes would benefit your business?

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EIS and EMI – Whaaaat?!!!

I don’t know if there’s something in the water around here right now but I seem to spending a huge proportion of my time advising clients on either:

  • the benefits (and potential pitfalls!) of the Enterprise Investment Scheme (EIS) aimed at tax efficient investments into fledgling fast growth companies and
  • rewarding employees under an approved HMRC tax efficient share option scheme called the Enterprise Management Incentive Scheme (EMI)

I will follow up with a more detailed analysis of the pros and cons of these UK statutory tax reliefs in future posts.

In the meantime, you know where I am if these are already on your agenda and you need some help.

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12 tax advantages of using a company as a business vehicle

  1. If the UK company taxable profits are £300,000 or less, a stand-alone company will normally pay corporation tax at just 21% (‘small companies’ rate’).
  2. This small companies’ rate reduces to 20% with effect from 1 April 2011.
  3. The standard rate of corporation tax is 28%. It will be reduced to 27% with effect from 1 April 2011 and there are plans to reduce it by 1% each year until the main rate is 24% by 2014. This rate applies to ‘large companies’ or those with taxable profits of £1.5m+ if stand-alone.
  4. Company structure allows for cash to be rolled up with low(ish) rates of tax suffered –  see points 1 and 2 above.
  5. Corporation tax is not payable until 9 months after the end of the accounting period for the majority of companies.
  6. R&D tax credits and other tax incentives are available for innovative companies.
  7. Remuneration strategies can be managed to optimise the personal tax position of investors and business owners.
  8. Investors in unquoted companies can obtain income tax relief on their equity investment e.g under Enterprise Investment Scheme (EIS).
  9. Shareholding investments in unquoted trading companies can attract 100% relief (exclusion from your estate) for inheritance tax purposes.
  10. Key employees can be incentivised through HM Revenue & Customs approved share schemes such as the Enterprise Management Incentive Scheme (EMI).
  11. Income on UK patents could be subject to a lower rate of corporation tax at just 10% (although unlikely to be introduced before April 2013).
  12. Companies within a corporate group (minimum of 75% common ownership of parent company) can shelter current year tax losses against taxable profits of other group companies.

More to come…

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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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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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