startup

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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Finding your true North

Richard North, Managing Director of Wow! Stuff, provides some great advice for entrepreneurs:

“You are either an employee and you are prepared not to take risks and end up with a bonus or you become an employer, you take risks but you also end up with the rewards”

Despite selling his first business for a 7 figure sum is next venture (boystuff.co.uk) came back to bite by heading into administration in 2005. His explanation for the business downfall sounds counter-intuitive yet it is a common reason for many business failures:

“We ended up with too many people on board and too many ideas on strategy. We tried to do too many things in a short period of time”

He goes on to say:

“I had become remote from the business as there were so many people running it, so I wasn’t feeling that emotional, but what did feel emotional was that I had lost huge amounts of money”

This is where the power of leverage can go horribly wrong – leverage of people and money. In an effort to grow a business fast, it can start to lose direction and when more and more (external) strategic heads get onboard then the founding entrepreneur can start to feel disempowered and disconnected from their ‘baby’ – this can be acutely common in VC backed businesses.  Often resulting in lights out.

North appears to be growing his latest business more gradually with a focus on a handful of products that will succeed and best of all, he appears to have rediscovered his passion for his latest venture.

Good stuff. Read more at Director

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A business idea shared is a business (almost) launched!

As a budding entrepreneur, its understandable to want to hold onto and covet that killer business start-up idea.

If you are on your own and perhaps struggling to drive the new business idea forward, the danger is that with every day you let pass, someone else gets closer to climbing ahead of you and launching the same or similar business. Or the pain or need that your idea solves becomes obsolete or outdated.

You need to share your vision or idea with as many people as possible.

This has three main benefits:

  1. It allows you to develop and hone your idea from the feedback received from others. This will save you a lot of (potentially wasted) time, energy and money in the long run, AND
  2. It provides an opportunity for others to introduce you to the people who may hold the key to launching and making your new business a success. Either as investors, future partners or just folk who’ve been there and done it, these contacts can be invaluable. Heck, you might even stumble across these people directly if and when serendipity steps in to plays its hand! AND
  3. It holds you accountable to carry out your plan. It is an act of commitment. Once you share your idea with the world, people will either cheer you on your well earned success or scoff if you limply throw in the towel. Its like having millions of personal trainers. Speaking of which (sort of) – Just do it!

If you remain unconvinced by the prospect of sharing your idea with the world, I’ll leave you with the following two assertions to ponder:

  1. Most people are busy running their own lives with their own priorities, issues, hopes and fears. The chances of anyone you meet thinking “that’s a great idea, I think I’ll steal it and go do it myself” and then having your passion and your insight to see it through are remote.
  2. The best innovators are businesses that are unafraid of the competition. They have complete confidence in themselves as game-changers at the cutting edge of their industry. Therefore, as fast as anyone tries to copy them, they know these competitors will only ever be mere pale imitiations.  They also wallow safe in the knowledge that the well of creativity and ideas is without end – think Apple. Nuff said.

Are you ready to share now?

Caveat – the above advice should not be applied in the case of new intellectual property or technical specifications e.g. software coding; technical drawings or know-how etc, which should remain top secret and protected.

11 essential action points after starting your company

Better to be a disciplined entrepreneur from day one. Here is a checklist of 11 tips how:

  1. Get your company incorporation certificate, Memorandum & Articles of Association downloaded and on file. Plus a shareholders agreement if you have one. This will form the basis of your statutory books which you must maintain for any changes in shareholders, directors etc going forward.
  2. Complete and file Form CT41G with HM Revenue & Customs to register your company for corporation tax purposes and to get your employer payroll package ordered and registered with HMRC (or refer to point 11).
  3. Get the relevant documents (in point 1) plus your passport and a recent utility bill together ready to set up a business bank account (get used to pulling together these personal docs for routine money laundering checks for pretty much all financial services).
  4. Set up an A4 lever-arched file ready to collate all of your paper invoices received for amounts payable. Put a divider in the file to separate paid invoices (behind the divider) from the unpaid invoices (in front of the divider). Start numbering the invoices received sequentially to (ideally) match your online accounting software (see point 6).
  5. Decide whether it is right for your company to register for VAT (or refer to point 11).
  6. Choose a decent accounting package so that you can get all of your financial affairs including invoicing etc set up ready. I like Xero.
  7. Check your founder(s) shareholding allocation now e.g. if there are any shares to be allocated to key (present or known future) management / employees do it now or asap before the value in the business (and therefore shares) increases. If you delay you could store up some nasty capital gains tax, income tax and national insurance liabilities for the future…
  8. Get all your ducks in a row with regard to all industry certification and insurance requirements for your particular sector. Would be embarrassing and unprofessional to get this wrong.
  9. Think now about protecting your crown jewels. Is there any intellectual property, trademarks or patents that need filing, protecting or transferring before you launch your BIG idea or go head-to-head with the competition?
  10. Go get yourself a natty logo, stationery and website. Remember to include your company name, address, registered company number and VAT (if applicable) on your documentation. Get business cards too. Register your Twitter account. Start a blog. Tell the world.
  11. Get yourself a supportive accountant and tax adviser who understands your niche :)

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7 tax incentives for UK digital & technology startups

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Having taken the risk and side-stepped the typical job route to become a tech entrepreneur and wealth-creator, its a good job that there are still some tempting UK tax incentives out there to support you.

Here are just 7 tax ideas or tips that you should be thinking about for your digital technology start-up:

  1. Entrepreneur’s Relief – if you hold 5% or more of the shares in your startup for 12 months and work as an officer /  director or employee, then when you come to sell the shares your effective tax rate will be just 10% on the gain. This is limited to the first £10m of gain over your lifetime . Sure beats an income tax top rate of 45%! Make sure you take this into account when setting up your company to ensure founders (and key employees) maximise this essential tax relief. You’d be gutted if you unwittingly held just 4% of the shares!
  2. R&D tax credits – get rewarded by the tax man for innovating in your sector by claiming this lucrative tax relief. Many entrepreneurs mistakenly believe that this tax incentive relates solely to industries with scientists wearing white lab coats but this couldn’t be further from the truth. This relief applies across industries – I have enjoyed particular success in the tech sector, for example, I have secured a £250k tax refund for a tech startup that had been (wrongly) advised by its accountants that it wouldn’t qualify for this relief! Most repayments are processed by HMRC within 30 days of a claim and you only have 2 years to make a claim before you’re time-barred. Don’t leave this cash on the table.
  3. Enterprise Investment Scheme – angel investors and private individuals are incentivised to invest in (perceived) higher risk investments like early stage start-up companies with tax breaks like the Enterprise Investment Scheme (or EIS as its more commonly called). Now is not the time for the exact detail suffice to say that many tech or digital startups would fall within the qualifying criteria thereby allowing smart investors to reclaim 30% income tax relief subject to certain limits. Just be aware for now that this is out there to tempt investors. [Update: Seed Enterprise Investment Scheme (SEIS) introduced since this post]
  4. Temporary National Insurance Holiday – for new businesses there is a recently announced temporary NI holiday for the first 10 employees limited to £5,000 per employee or £50,000 overall. The scheme officially kicks off in September 2010 however there should be relief for businesses started post 22 June 2010. This relief is location specific with most of the South East barred so you need to check qualifying locations. Startups across the North will qualify so now is a good time to start building your team.[Update: Now gone – there is an Employer’s NIC £3,000 annual allowance at the time of writing Jan 2017]
  5. Get paid at mouthwatering tax rates compared to most employees – once you get past the pre-revenue stage and start making profits, shareholders of small companies have the flexibility to structure their remuneration package to optimise take-home pay. Why pay up over 20%, 40% or even 45% income tax and incur huge National Insurance costs on employee salaries when you can pay yourself a combination of a small salary, dividends (and pension contributions) which, if carefully managed, can result in £nil income tax or NI for c£40k of remuneration. [Update: Dividend tax rule changes since 6 April 2016 reduce benefits]
  6. Get 100% tax relief on your new equipment – so you need to invest in new Macbooks, laptops, servers and other gadgets for your business. You can claim 100% tax writing down allowances (‘Annual Investment Allowance‘) against profits on your ‘first’ £200,000 (!) of capital expenditure each year [note: this relief has bounced around in recent years since; be wary of timing – it is £200,000 at the time of this update (Jan 2017)]
  7. Patent innovation box – coming soon (allegedly) will be a ‘patent box’ which will allow income or profits on registered patents to attract lower company tax rates of c10% (as opposed to a current lowest corporation tax rate of 20%.

If you’d like to discuss how any of these tax incentives could be applied in your business, please drop me a line via the contact page or you can find professional specialist advice and help at ip tax solutions. Happy to discuss.

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