- Don’t assume your company doesn’t qualify – even if your accountant has discounted it or perhaps not even mentioned it (in fact that might be all the more reason to check it out!)
- It doesn’t matter whether your company is profitable / tax paying in a financial period or loss-making – R&D tax relief can benefit you and release cash into your business in both cases
- Think about R&D tax relief and how it might apply to your company as early as possible. This way you can ensure that you are capturing relevant supporting information, documents and costs as you go along – rather than trying to cast your mind back and rebuild retrospectively which might lead to sub-optimal claims
- Don’t discount R&D tax relief if you carried out eligible activities a couple of years back thinking you’ve missed out – you can make a retrospective claim for accounting periods ending in the past two years. So at the time of writing this post (20 June 2016), say you have a 30 June financial year end then the periods ended 30 June 2014 and 30 June 2015 are still open and eligible for R&D tax credit claims.
- Don’t wrestle with the definition of what activities qualify for R&D tax relief on your own – many companies wrongly count themselves out when a quick chat with a R&D tax specialist might have helped them understand how they do qualify. Many company owners are stunned at the breadth of the R&D tax relief.
- Don’t think you have to leave your current accountant to access specialist R&D tax advice – most R&D specialists will supplement the good work your accountant is already doing for you with their specialist R&D tax services so this needn’t upset your ongoing accountancy support relationship.
- Think about how the UK R&D tax incentive can fit into your overall funding profile – so tax advantaged funding such as SEIS / EIS can typically be used in harmony with the R&D tax incentive. Watch out for grants as these can impact adversely on the levels of tax relief available under the R&D tax incentive. Cash tax breaks such as the Patent Box can be used alongside the R&D tax relief. As you can see, thinking about how this can all fit together sooner rather than later will help optimise available funding.
Here’s a round up of some recent financial & tax news that might be of interest – you can find an audio download version of this post below:
Calls for quarterly R&D tax relief for SMEs
In an effort to boost SME cashflow, there are calls for the Government to make the UK R&D tax incentive a quarterly rather than end of year tax relief. Currently SME companies claim R&D tax relief retrospectively. Large companies can, however, reduce (in year) quarterly instalment tax payments that they are required to make thereby securing the benefit of the relief earlier. This measure would help level the playing field. This makes sense – we’ll have to wait and see…
March Budget 2016 – Pension countdown
George ‘O’ will step up on 16 March 2016 to deliver his Budget Statement and the big news is expected to be regarding restrictions on income tax relief on pensions for higher rate tax-payers.
Action point: Consider making pension contributions in advance of the Budget date.
Patent Box changes afoot – act now
New, more stringent rules will apply to companies that elect into the Patent Box tax incentive after 30 June 2016. This follows the ‘beating’ this UK Gov tax incentive received from other EU states following its introduction in 2013 (but for how much longer in the light of a possible Brexit….?).
Action point: If you have a patent or patent pending, consider electing in before 30 June 2016.
Get ready for new dividend tax rates
From 6 April 2016, new dividend tax rates will apply that results in an almost complete shake-up of the fairly established remuneration structures for most owner-managed companies.
Action points: Run some calculations to see how you might be affected and consider paying further dividends in advance of the 5 April 2016 deadline. Note that companies that qualify for R&D tax relief might have some of the down-side offset by receiving a greater proportion of the remuneration in the form of PAYE salary / bonus and claiming enhanced R&D tax relief (dividends are not eligible).
Buy-to-let changes – traps for the unwary
I probably don’t need to tell you more about the widely publicised restrictions being placed on buy-to-let interest relief etc but watch out for the Stamp Duty Land Tax (SDLT) 3% surcharge that can bite in what might otherwise be fairly innocuous circumstances…
For example, buy a new residential house before selling old residential house = 3% ouch! You might be able to receive a refund in these circumstances but the initial additional SDLT outlay can be significant and is yet another case of a tax sledge-hammer to crack a nut!
SEIS / EIS Course Launch
By popular demand, we have set up a new course setting out in the ins-and-outs of the hugely popular (yet often misunderstood!) Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).
These UK Government tax incentives are growing in popularity – especially with the growth of crowd-funding platforms such as Crowdcube. We have helped and continue to help 100’s of companies navigate and make the most of these tax reliefs which can be quite tricky to navigate for the uninitiated.
If you are a company founder or considering diversifying into business angel investing yourself, you should benefit from this course.
You can sign up to receive the course via email here:
As we run up to the 7 May 2015 election, thoughts turn to what the result might mean for UK startup and fast growth companies?
Techcrunch has noted the partisan approach that UK tech companies seem to be taking in writing a letter in support of the Conservative Party and points out that this stance should be taken with a pinch of salt (although I understand the article was penned by a declared Labour supporter ;) ).
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.
We may just be about to find out more…
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.
You may be contemplating seeking a patent for your invention but you’re not quite sure where to start?
Here we share a real back-to-basics 101 session on patents with the friendly folk at Appleyard Lees – European Patent & Trademark Attorneys who answer frequently asked questions in relation to patents and patent strategies.
- what rights does a UK patent offer?
- what can typically be patented?
- when to patent an invention?
- strategies for patenting an invention
- common errors in approach to patenting an invention
- typical costs and approach
Note that this interview was recorded in early 2014 and has only just been published as there were some ‘technical issues’ with the recording
Sometimes there is little alternative but to issue shares to investors, employees and other stakeholders. If the company’s an early stage company then it has little else to ‘sweat’ to release some cash.
You might be able to benefit from the Seed Enterprise Investment Scheme (SEIS) or the Enterprise Investment Scheme (EIS) but – although technically related to your company – it is the investor that pockets the tax relief (not you). You might be able to squeeze some more cash out of the investors by virtue of the tax relief they will receive but (as the rules currently stand) you have to issue shares to them in return for their investment.
Whilst money for salaries is tight, employees may benefit from an approved share option scheme like the Enterprise Management Incentive Scheme (EMI). Although they only hold a piece of paper entitling them to the shares at some point in the future (say on an exit), you must still take into account the post dilution shareholdings once their shares are issued.
So you started with 100% of the company and very quickly you might find that your shareholding is down to not much over 50%. And then there’s that big VC round you’re contemplating in a year or so – further dilution to come…..
There is only ever 100% to divide up. For each 1% that goes it has gone (probably) for ever. Often it is a price worth paying as the old saying goes,
“its better to have 40% of a successful large pie than 100% of a failing tiddler”
But at every stage you should try to ensure that you have explored incentives that do not require you to part with your equity in your company.
So you could look at R&D tax credits and grants. Also, further down the line the Patent Box could shave some much needed cash off your corporation tax bill. These Government tax incentives and grants do not require you to give up any of your shares in return for the cash and so could allow you to get further down the line to achieving your milestones with no further decrease in your shareholding.
Often in practice, companies have little alternative but to push through with investment for shares in the company but its always useful to remember that there are other (non-equity) funding avenues available.
Here are the slides that I used to present to the Chartered Institute of Patent Attorneys (CIPA) at a seminar in Liverpool last week. The key relevant theme was the Patent Box (given the audience) but my objective was to emphasise how and where the Patent Box fits into the wider series of Government tax incentives aimed at innovative IP-rich UK companies.
From start-up we have the Seed EIS followed by EIS for tax efficient funding. Both schemes are designed to support companies undertaking R&D work and creating their own IP.
R&D tax credits then step into support companies during the development phase. The R&D tax credit relief continues to be a fantastic source of support for UK companies but up until 1 April 2013 there was a cliff-edge at the exploitation stage as there were no tax incentives there to support IP rich companies.
This where the Patent Box steps in to support companies with qualifying patents to complete the innovation business lifecycle.
The new Patent Box tax incentive is phased in this month allowing qualifying companies to claim a beneficial rate of corporation tax of just 10% (by 2017) on worldwide profits derived from qualifying patents.
Responses from UK business so far has been disappointingly muted so its good to see that this new relief is attracting the attention of overseas companies who may now take the UK seriously as a location to set up new ventures – particularly hi-tech businesses.
See this extract from David D. Sprague of Baker & MacKenzie LLP in Palo Alto CA:
“What makes the U.K. patent box particularly interesting for U.S. multinationals is that the United Kingdom has always been a logical base of foreign operations for U.S. groups. For example, the U.S. high-tech community has found the United Kingdom to be an attractive jurisdiction in which to locate regional management headquarters, and some English industrial parks look like they have been transported from Silicon Valley. Advertising-supported internet-based businesses are particularly attracted to the United Kingdom, as London remains the region’s preeminent center of the advertising business.
So if the United Kingdom can get its patent box right, there is a real possibility that some U.S.-based internet and similarly situated businesses could see reasons to consolidate more activities in the United Kingdom, even making their U.K. group entities the central economic entrepreneur for their offshore structures.”
If we manage to pull this off and attract exciting new businesses and jobs – this would be a great result for the UK.
In the meantime, if you are a start-up, growing business or more mature SME – please don’t overlook the Patent Box, especially as it’s right on your doorstep!
Mark knew that his new business would be at the cutting-edge of technology and potentially even a world-player – exactly the sort of business that the UK Government is keen to promote and support in the form of tax incentives.
Fully aware of the opportunities that the UK tax code provided for releasing cash into his new venture, Mark kicked off by raising an initial £150,000 under the Seed Enterprise Investment Scheme (SEIS). A 50% income tax break for the investors made it easier to nudge up the cash they were willing to part with; plus the opportunity to sell their shares after three years – capital gains tax ‘free’ – made the investment even sweeter. Mark had pondered utilising this tax break on his own £10,000 investment into the company but decided that, on this occasion he wanted to retain more than 30% of the share capital (which precluded him from SEIS) – maybe next time…
This SEIS cash would be used to fund the R&D phase in employing a small team of developers. Given that the company was pre-revenue, Mark was able to claim a welcome tax refund from HM Revenue & Customs under the SME R&D tax credit scheme. This released in excess of £30,000 into the business which was promptly used to fund a further developer outside the SEIS funds to accelerate the project.
Having made significant inroads on the R&D work (whilst burning through in excess of 70% of the SEIS cash!), Mark approached investors for a further round of funding – this time under the Enterprise Investment Scheme (SEIS’s ‘big brother’!). A 30% income tax break this time for investors (plus potential for a capital gains free exit) provided sufficient enticement for investors to inject a further £2m into the company.
Meanwhile, whilst the R&D work was ongoing, Mark had made investigations regarding the potential for filing one or more patents on aspects of the underlying invention generated by the R&D work. With the arrival of the new Patent Box tax incentive from 1 April 2013, Mark knew that a 10% corporation tax rate by 2017 on worldwide income derived from qualifying patents could add additional value to his company as it approached an exit as well as releasing further much needed cash into the business from now until then.
Eyeing an exit in 3-5 years time, Mark ensured he retained at least 5% of the share capital post dilution at each funding round in order to secure a capital gains tax rate of just 10% on his first £10m of gains. His SEIS and EIS investors should be extra happy with a 0% capital gains tax rate after three years!
All in all, Mark had pulled the relevant statutory tax incentive levers to maximise the release of cash into his business at each stage of its life-cycle. What was this worth? It depends – the SEIS, R&D and EIS savings total approximately £700,000 but assuming a profitable few years under the the Patent Box and taking into account the above savings it is not difficult to reach overall pre-exit cash tax savings of £1m+.
Getting advice from the start can get you on the road to being a tax aware entrepreneur…
The new beneficial Patent Box rules will be introduced with effect from 1 April 2013 and it is important therefore that companies consider how they might benefit from a 10% corporation tax rate.
There is a common misconception amongst tech companies that software cannot be patented (although this misconception is understandable when you take an initial look at the relevant patent law…)
UK patent law excludes:
‘a scheme, rule or method for performing a mental act, playing a game or doing business, or a program for a computer’
from constituting inventions for the purposes of filing a patent; however, the legislation subsequently offers a small crack of light for tech companies by limiting the application of this exclusion.
To understand more we need to refer to relevant case law and this has evolved to the stage where software can be patentable in the UK and Europe where it can be demonstrated that the software or coding makes a technical or inventive contribution to ‘human knowledge’. In effect, we look beyond the fact that the invention is a computer program to the underlying technical contribution or technical solution that it brings about provided it is novel and inventive.
For example, consider a software program that allows imagery to be digitally enhanced or improved. This could be patentable if it can be demonstrated that the technical problem that has been overcome is novel or inventive and therefore results in a contribution to ‘human knowledge’ – it just ‘happens’ to have been achieved using a computer program and therefore this should not preclude a patent. You can envisage software that can solve technical problems for physical hardware e.g. speed of data transfer, as well as solving technical problems related to the software all of which could be patentable.
Both the UK and European patent offices grant patents for software in cases where the facts fit which is crucial for the purposes of claiming the benefits of the Patent Box. The US rules are of little assistance to us here as a US granted patent will not qualify for the Patent Box.
Incidentally, if you find yourself pursuing patents to protect your idea and benefit from the Patent Box – don’t forget about R&D tax credits!