Startup company

What is SEIS?

SEIS: Startup term I wish I understood but was afraid to ask!

Here is a brief overview of the Seed Enterprise Investment Scheme from a company founder’s perspective.

Armed with more knowledge about this fantastic UK tax incentive aimed at start ups and early stage growth companies, hopefully we can get more impetus behind this government scheme and more backing for promising new companies.

If you need any specific advice, please contact me.

Or try our SEIS DIY Kit.

Enhanced by Zemanta

Getting the most out of SEIS to fill the funding gap

Meet Drink Think, Start-Up Cafe, Coventry Univ...The Seed Enterprise Investment Scheme (SEIS) provides an excellent opportunity for early stage fast growth companies to access funding from founders, family, friends and business angels.

In essence it rewards investors by allowing them to reclaim income tax at a rate of 50% of their investment under the scheme (limited to £100,000 investment per tax year) plus a potential capital gains tax free disposal after three years.

But such a generous tax break comes with (many!) terms and conditions….

Common areas where there seems to be much head-scratching is around the limit for the SEIS investment into the company of £150,000 in total; the limit of £200,000 or less gross assets and the 30% connection test. Note these are just a few of the conditions!

Given the above, how can founders make the most of this SEIS tax break whilst getting the funding they need?

  1. Try to spread the £150,000 total investment between investors / founders to avoid breaching the 30% connection test e.g four individuals with 25% each can work well
  2. Remember the test for the £200,000 gross assets is applied immediately before the issue of the SEIS shares – so you could seek external (non-SEIS) investment top-up funding afterwards. Note that EIS funding is only available once 70% of the SEIS funding has been spent.
  3. Investor(s) could invest an amount as a subscription for SEIS shares up to 30% of the share capital and then loan the remainder.
  4. Investor(s) could invest further amounts in a company by subscribing for less shares but with the remainder being credited to share premium e.g. if an investor / director already holds 29% of the ordinary share capital they could invest a further sum (subject to the SEIS limits) for a further 1% of the ordinary share capital with the remainder posted to share premium.

These are just a handful of examples based on recent experience of advising fast growth companies and investors – as always there are many ways to skin a cat but it is important to review all options to make the most of the UK SEIS and EIS tax reliefs.

Enhanced by Zemanta

Crowdcube: A useful funding option for UK startups and fast growth companies?

Crowdcube presents an interesting angle on an idea I’ve been pondering for a while:

“How can we open the door for armchair investors to (partially) fill the funding gap suffered by UK startup businesses whilst providing a more interesting and varied investment opportunity compared to say traditional pension or ISA investment offerings?”

Business angel investor networks are well established, however, these are normally aimed at high net worth individuals (broadly those with income of £100,000+ and/or significant assets) who are willing to write cheques for more sizeable sums than those accepted by crowdcube – in fact crowdcube is willing to accept investment cheques from just £10.

Zopa already provides an innovative peer-to-peer banking exchange for individuals e.g. to pay off credit card debts, buy a new car etc from individual lenders who can lend in small parcels of cash (typically no more than £20 per borrower) to minimise the credit risk. By cutting out the middleman (aka banks), Zopa can pass on cheaper interest rates for borrowers and higher income for lenders – a win-win.

Can Crowdcube pass this on for small business?

The answer right now is I’m not sure. But I’ll be keeping a close eye on it and may well try the service to see how it works.

Here are some initial observations:

  • The site clearly needs more investment opportunities but this should come over time.
  • I like the idea of implementing video presentations etc in the future to give added depth to the pitches (more like the Dragons Den experience).
  • I am unsure about the forthcoming trading exchange for exiting investments as its not really in keeping with the nature of private company investing – its a medium term play at best and short-term thinking is the sort of mentality that’s got us into the recent financial mess. Still, if it gets more individuals interested in supporting small, private companies then this can only be a good thing.
  • I would like to see more on the tax benefits of EIS brought into the investment process – especially given the recent announcement in the Budget 2011 – although the mechanics of applying this in practice could give its own challenges given the low levels of some investments, tracking / admin plus education and support required.

Overall, I think that Crowdcube is a great and welcome addition to the funding network for start ups and fast growth UK companies. I look forward to seeing how this service unfolds over the coming months.

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.

Enhanced by Zemanta

Business Tips for Start-Ups from David Hansson – 37 Signals

Some key learning points for fast growth and start-up companies:

  • Common misconception that start-ups need external finance.
  • Taking other people’s money leads to bad choices – too much staff, computers and too much time.
  • Don’t waste your time raising money. Prove the business on its own revenues.
  • Make sure you are working on your best idea right now. If not, move on.
  • Market share is not important. Profits are important. Look at Apple’s (l0w relative) market share on computer hardware and smart phones yet huge profits.
  • Don’t chase the vanity of high revenues. Profits are all that matter.
  • Number of employees is irrelevant – you can run a successful business with 1 employee.
  • Build a business that is scalable – if you land a further £100,000 of orders, you don’t want to have to ramp up your employees and capital assets to match.

Hard to fault these words of wisdom – I would only substitute ‘cash’ for David’s repeated reference ‘profits’ as being key plus keeping the ‘WHY’ you are in business at the forefront at all times i.e. how will your business change the world?

Well worth watching.

Reblog this post [with Zemanta]