Judging by the rapid uptake in the number of calls and enquiries we are receiving on a weekly basis from entrepreneurs and founders looking to ensure that their company is SEIS / EIS tax ready – I think it is fair to say that SEIS / EIS tax benefits are now getting the attention they deserve!
So if you are a star company looking for rapid growth and you’re in search of investment, then you really need to get up to speed with the tax benefits that SEIS / EIS government tax incentives can potentially bring you.
I’m afraid to say that it can be quite complex in parts – good news is that we’ve set up an email course to help you swot up!
Our resource of the week is Rapportive – a useful Gmail extension that brings your social media connections, such as Linkedin, directly into your inbox. It is a good way of keeping in touch with existing contacts and for reaching out to potential new connections…
In this conversation, we cover how Modwenna made the transition from corporate financier to entrepreneur and founded Angel News which brings thought-leadership and insights into the field of private company investment – aimed at both investors and entrepreneurs.
Please get in touch with your questions and feedback via Twitter: @iptaxsolutions and/or #fgbpodcast
If you are a UK entrepreneur and would like to share your story, please get in touch as above. Also, if you are involved in advising entrepreneurs on building scalable businesses, we would be delighted to hear from you and to get you involved if you’re the right fit.
Listen to an audio version of this Summary Budget 2015 round up of the key tax changes impacting on entrepreneurs or read the text version below:
An audio download link is available at the end of this post!
Reduction in Corporation tax
Continuing George Osborne’s pledge to make the UK one of the single most attractive places to do business in the G20 he continued with his downward pressure on the UK corporation tax rates. Not content with reducing the main rate to 20% from 28% not too many years ago, he pledged to reduce it further to 19% by 2017 and down to 18% by 2020.
Before we get too excited about the CT rate reductions, it was once again a “give and take budget” as Mr Osborne announced some far reaching changes to the dividend tax regime that will impact on many entrepreneurs and increases to the minimum wage – the now so called “Living Wage”.
Dividend tax changes
It has long been the case that entrepreneurs could extract profits from their companies as dividends rather than salary – the key advantage being NIC savings as dividends are not (currently) subject to NIC. The income tax suffered on dividends is lower than salary as dividends are only available from retained profits that have been subject to corporation tax – so a tax credit system is applied to dividends that, in essence, results in 0% income tax payable by basic rate tax-payers (so broadly up to £42,000 – £43,000); 25% of the net dividend payable for higher rate tax payers and 30.6% for additional rate tax payers.
Seemingly forgetting about the double taxation impact on dividend payments, the Chancellor announced that there will be a £5,000 dividend allowance from 6 April 2016 (whoop whoop!) and then a 7.5% additional tax applied to dividend income – so our rates now become basic rate: 7.5%; higher rate: 32.5% and additional rate: 38.1%.
Looking at the HMRC projected figures, they are looking to net quite a windfall on this change that is a tax grab via the back-door – I don’t think many entrepreneurs have quite grasped this change as it was positioned as a change that might impact on those with substantial quoted shareholdings and contractors.
Will we see larger dividend payments pre 5 April 2016 with founders leaving credit loan balances to draw down over the foreseeable future?
Employment allowance increase
We should see the £2,000 NIC allowance for employers increase to £3,000 from 6 April 2016
Annual investment allowance
The annual allowance for investment into capital equipment (e.g. PCs, servers, desks, chairs, machinery etc) was set to fall to £25,000 pa by the end of this year but this was increased and pegged at £200,000 for the next five years.
There were some further changes to EIS building on proposals from the Autumn Budget Statement that include proposals to cap the total amount that can be raised under EIS at £12m (£20m for ‘knowledge intensive’ companies).
Also, a new limit on companies raising EIS making it available only to those companies that have been trading for less than 7 years (10 years for knowledge intensive companies) – this change seems unreasonably harsh for longer more established companies that might want to access capital. The requirement for 70% of the SEIS cash to be invested before shares can be issued under EIS will also be removed as originally noted in the March 2015 Budget. Finally there was reference to ensuring that EIS funds are directed toward developing companies so there will be restrictions on using EIS monies for buyouts and acquisitions and more of a need to demonstrate that the funds are being employed to develop and grow trading companies.
There were no changes announced to the SEIS regime.
Many entrepreneurs will have diversified their risk with potentially one or more buy to let properties within their portfolio. These were also hit with some quite serious changes to the tax regime with the most hard hitting being the reduction in interest relief on buy to let mortgages being reduced to the basic rate of tax only. Currently, landlords can offset the mortgage interest at their marginal rate of tax (so potentially up to 45%). These new rules will be phased in to ease the pain of potential deleveraging for some landlords but the writing is on the wall for many – and who’s to say that this is the end with potential for 0% interest relief in the future….?
There will also be the removal of the 10% wear and tear allowance from 6 April 2016. Yet more pain for landlords.
On the downside, there were announcements that those with total income over £150,000 would be hit with reductions in the amounts they can put into their pension with the £40,000 annual allowance being tapered away with it hitting just £10,000 for those earning £210,000 or more. This is a admin headache all round and it comes into force from 6 April 2016.
On the plus side, there was a consultation announce to explore the best ways for pensions to be saved and a seemingly open approach to considering alternative finance in line with improvements to ISAs – this is great news for our thriving Fintech sector.
Inheritance tax changes
Long discussed and unsurprising was the pledge to increase the inheritance tax level to £1m to allow homes to be passed on without incurring IHT. Slightly odd in that the £325,000 nil rate band remains in place for the next 5 years but we have this additional £175,000 especially for the family home. Inflation may start to dig a hole into that £325,000 allowance rendering this less beneficial over time than the headlines suggest.
It was a shame that we didn’t see any changes to the VAT MOSS / (#VATmess) regime and I think the changes to dividends and pensions will add to uncertainty for many entrepreneurs and their advisors as the goalposts keep moving which is disappointing.
I don’t want this to fall into a political rant but I sense there is a lack of transparency in the Labour party’s stance on how it might build on the successes that we have already seen in terms of tax policy for UK tech and fast growth companies.
For example, the Conservatives have made great strides in the following areas:
The introduction of Seed Enterprise Investment Scheme (SEIS) and its generous tax incentives to support investment into early stage companies to supplement the Enterprise Investment Scheme (EIS) aimed at more established companies
The improvements made to the Enterprise Management Incentive (EMI) share option scheme to allow participants to benefit from Entrepreneur’s Relief despite potentially not holding the shares for 12 months nor even holding more than 5% of the share capital
Improvements to the R&D tax credit incentive scheme that now boasts a 33.3% return for claimant SME companies
Introduction of the Patent Box at its beneficial 10% corporation tax rate – despite challenges from across the EU
Enhancements to Entrepreneur’s Relief that now allows entrepreneurs to benefit from a 10% CGT rate on the first £10m of lifetime gains
Reduction in the main corporation tax rate down to 20%
Plus video games tax relief and other reliefs for creative and digital companies
Taken together these measures keep the UK on track to meet George Osborne’s pledge to make it the most attractive place to do business in the G20.
It is worth noting that many of the above tax incentives were first introduced during Labour’s last bout in office; albeit in a more watered down form in most cases – although who’s to say that Labour might not have followed a similar path had they stayed in the office…? Truth is, we don’t know.
And herein lies the problem…
Labour do not appear to have shared much detail on their thinking and policies around these areas and, in particular, these specific tax incentives. The danger is that an incoming party wants to “shake things up” and “make their mark” which may threaten the stability and progress made around these important areas for UK entrepreneurs.
Description: In this 45 minute webinar, Steve Livingston, founder of innovation tax specialists – ip tax solutions, walks entrepreneurs / founders of UK technology and digital companies through 5 vital tax planning opportunities that are often overlooked – potentially losing out on £100,000’s of cash tax savings!
These 5 essential tax tips are based on UK Government tax incentives that have been enacted to help and support tech and digital companies just like yours…
This free webinar aims to provide participants with an awareness to be able to move forward in exploring these cash saving (and potentially raising) opportunities within your business.
You should ideally be the founder, CEO, CFO of a UK based technology, digital or creative company to get the most out of it.
Date & Time: Thu, May 7th, 2015 at 1:00 pm BST
Please register for the above meeting by visiting this link: http://iptaxsolutions.enterthemeeting.com/m/FQZFF9B3
Once you have registered, we will send you the information you need to join the webinar.
Enterprise Management Incentive share option schemes (or ‘EMI’ for short) have long been a useful tool for entrepreneurial fast growing companies that wish to both tie-in key employees and incentivise them tax efficiently with the promise of jam tomorrow in the form of a slice of the share equity.
The peculiar thing as evidenced from the chart above is the apparent lack of take-up by start-ups and SMEs – even ignoring the flat-lining in recent years which could be attributed to the general market malay – in that only approx 7,500 companies have an EMI scheme across the entire UK…! Which begs the question:
Is your company missing out on an EMI share option scheme?
Before going any further, its worth having a brief recap on the key tax benefits of an EMI share option scheme for qualifying companies:
No income tax or NIC cost on grant or exercise of the EMI options
Growth in shares under EMI option subject to capital gains tax (CGT) rather than dreaded income tax (45% anyone?!)
Potential for Entrepreneur’s Relief for EMI option holders even though they may ultimately hold less than the normal required 5% shareholding plus the 12 months accruing from grant of the share option (a MASSIVE recent change)
Corporation tax deduction for the company on exit in most cases.
Admittedly the entrepreneur’s relief relaxations (which I have long banged on about!) are fairly recent changes; but still, the benefits are plain to see, compared to say unapproved share options which normally have income tax and NIC written all over them…!!!
Let’s not forget that for cash-strapped start-ups and early stage companies, the ability to give highly valued employees a stake in the company with no cost outlay is a huge deal especially in the current economic climate – also, note how the company can get a tax deduction (on the increase in value between the exercise price and market value) even though the company has not incurred an expense as such!
There is also flexibility as to how and when employees can exercise the EMI share options e.g. with some being structured as ‘exit only’ options (ie the EMI options vest only minutes before a sale of the company) and /or performance criteria can be included to keep the relevant employees on their toes!
So why poor take up for EMI share schemes in the UK?
Here’s my take from experience of talking to entrepreneurs about structuring tax efficient employee remuneration planning and EMI’s in particular:
Unawareness of the scheme – sad but true, many accountants have not advised their clients that such a mechanism exists to incentivise their employees tax efficiently for both themselves and the employing company.
Too complex & costly – this is normally a misconception. Okay, the rules can be cumbersome in parts and there are some strict eligibility requirements but if you work with advisers who have implemented EMI option schemes before, this should be a problem. The costs should be far outweighed by the savings – oh, and our professional costs for setting up EMIs are tax deductible!
Bad experience in a ‘previous life’ – this can be an issue where unrealistic expectations are set when the option scheme is set-up and things don’t materialise as expected e.g. no exit occurs within the expected time-frame or if it does, the gains for the EMI optionholders turn out to be fairly paltry compared to the vision painted at the outset. Sometimes the very employees who suffered at the hands of a badly communicated EMI scheme set-up are now at the helm of their own company and are understandably fearful of inflicting the same disappointment on their own team. Managed well, this should not be an issue but it does come up…
No clear exit plan – EMI’s are designed for entrepreneurial fast growing companies and, although a company can’t have an immediate sale on the cards when it sets up the scheme, it needs to have a time-frame and clear action plan for how it will allow its employees to realise the value they hold in the paper that will turn into shares. Like point 3, we’re down to managing expectations…
What’s your experience of EMI option schemes (good and bad)?