Tax Efficient Ways to bring investment into your growing business

In the current economic climate, offering a tax efficient option may make the difference between securing a potential investment or not.

Business Structure

Before considering the potential tax incentives available to investors, it is worth taking the time to consider the structure of the business.  The main tax incentives available to investors are only available to companies, so if the business is not already incorporated, this may be worth considering. 

Enterprise Investment Scheme

The Enterprise Investment Scheme (EIS) is designed to help smaller high-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.  Subject to specific conditions being met, individuals are able to obtain income tax and capital gains tax reliefs on investments in newly issued shares in unquoted companies.  The main reliefs are:

·         Income tax relief at 30% of the cost of the shares up to a maximum of £500,000 in one tax year.

·         Shares qualifying for income tax relief are free from Capital Gains Tax on disposal.

·         Capital gains tax deferral relief.  Where the proceeds of any gain are invested in qualifying EIS shares within certain time limits the payment of tax is deferred until the EIS shares are disposed of.

The main conditions for the investor are:

·         Maximum investment of £1,000,000 per investor in any one tax year.

·         Shares must be held for a minimum period of 3 years from the date of issue or from the date that the company started trading, if later.

·         The investor must not be connected with the company.

and the company must:

·         Be unquoted (although may be AIM listed).

·         Not be controlled by another company.

·         Have gross assets of less than £15m before any EIS share issue and £16m immediately after.

·         Have fewer than 250 full-time employees.

·         Carry on a qualifying trade or be the parent company of a company carrying on a qualifying trade.

Companies can raise up to £10m in any 12 month period under EIS.  It is important that investors are aware of the rules that the company has to observe, not just at the time of the investment, but for at least 3 years after.  If it fails to meet those rules, tax relief will not be given, or, if it has already been given, will be withdrawn.

Seed EIS

The government is keen to encourage investment in small, start up companies and, from 5 April 2012, introduced the Seed EIS.

The Seed EIS offers more generous reliefs to individuals investing in smaller, potentially risky, early stage companies who may otherwise experience barriers to raising external finance.  In addition to a 50% income tax reduction for the 2012/13 tax year only, for investments of up to £100,000, there is also an exemption from Capital Gains Tax for gains realised on any asset, on a £ for £ basis ,where the gains are invested in the Seed EIS.

The main conditions for Seed EIS companies are:

·         25 or fewer employees.

·         Assets of up to £200,000.

·         The company must not be more than 2 years old.

·         Total amount raised under the Seed EIS is limited to £150,000.

Venture Capital Trusts

Venture Capital Trusts (VCTs) offer investors the chance to invest indirectly in a range of small, higher risk trading companies whose shares and securities are not listed on a recognised stock exchange.  VCTs are run by fund managers who are usually members of larger investment groups.  Investors can subscribe for, or buy shares in, a VCT, which invests in trading companies, providing them with the funds to help them develop and grow.  The main reliefs available to investors in VCTs, subject to an annual investment limit of £200000, are;

·         Exemption from income tax on dividends from ordinary shares in VCTs.

·         Income tax relief at a rate of 30% of the amount subscribed.

·         Relief from Capital Gains Tax on disposal of qualifying VCT shares.

The limits for qualifying companies are the same as the EIS limits.  Investors are required to hold their shares for at least 5 years.

VCTs must be approved by HMRC and approval is given subject to a number of conditions being met.

Entrepreneurs’ Relief

The availability of Entrepreneurs’ Relief (ER) can make a potential investment much more attractive as a significant amount of tax can be saved when the investor chooses to exit.

ER allows individuals and some trustees to benefit from a lower 10% rate of capital gains tax (as compared to the usual 18% or 28% rates) on a “material disposal of business assets”.  A material disposal includes the following:

·    all or part of a business

·    certain holdings of shares in a company

The main conditions for a disposal of shares in a company are:

·         The company must be a trading company or holding company of a trading group.

·         The shareholder must be an officer or employee and hold at least 5% of the ordinary share capital and at least 5% of the voting rights.

There are a number of conditions relating to the disposal of a business interest.

In order to qualify for ER, an individual taxpayer has to meet all qualifying conditions for one year.  For shareholdings this means that the shares will need to be held for at least a year in order to qualify.  Not all business disposals will qualify for ER, so it is important to check that the conditions are met, not just initially, but on an ongoing basis to ensure that the eventual disposal will qualify.

Employee Ownership/Share Schemes

Employee ownership is an increasingly popular way of attracting, not just financial investment, but commitment and potentially improved growth for a business.  Many businesses look for and struggle to obtain external investment without even considering employee ownership, which could be a realistic and incentivising option.

There are a number of tax efficient ways for employees to buy into a company, including EMI, Share Incentive Plans and Approved & Non-Approved Share Schemes.  These may not always result in an immediate cash injection, so may need to be used in conjunction with one of the other options above.  Each scheme has its own complex set of rules so specialist advice should be taken to ensure the scheme conditions are met, the scheme continues to qualify and does not conflict with any other schemes already in place, such as EIS.

Conclusion

Whilst tax should not be the only driver in any business decision, offering investors a tax efficient option may make all the difference.  There are a number of options available depending on the requirements of the investor.  In the current economic environment, businesses need to offer investors tax efficient options to stand the best chance of securing investment.

For further information/advice on this topic please contact Sarah Brock at Ward Williams Chartered Accountants, Weybridge on 01932 830664 or email:  sarah@wardwilliams.co.uk

Maximising Patent Box opportunities - Ward Williams Breakfast Seminar

Companies holding patents or with exclusive rights to use patents have the opportunity to significantly reduce their corporate tax burden on products or services covered by those patent(s) when the UK Government’s new Patent Box regime comes into effect on 1 April 2013.

Although your company may not currently hold or use any patents, don’t assume that Patent Box won’t apply to you.  You may have products, processes, formulas or licences, for which a patent application can be made.  The tax benefits of the new scheme are attractive and may allow companies to reduce their Corporation tax rate to 10%.

Companies should take action now to understand how they might benefit from the regime and what business changes might be advantageous prior to the rules coming into effect.

Speakers from Ward Williams Chartered Accountants and Withers & Rogers Patent & Trade Mark Attorneys will explain the tax benefits of the new Patent Box regime, how Patent Box can benefit you, the types of products and processes that can be patented, procedure, timescales and actions to be taken now.

Venue: HSBC, The Old Warehouse, 37a Church Street, Weybridge, Surrey, KT13 8DG

Time/date: Thursday 13^th September 2012, 8.30am – 9.30am (registration and refreshments from 8am. Questions and networking from 9.30 - 10am)

We would be delighted if you could join us, but places are limited so please RSVP to ezovich@wardwilliams.co.uk by 30 August.

Do I need a Will?

An FT Adviser Story last year published the results of a Survey by Foresters Friendly Society and survey firm ICM Direct.

“61% of people surveyed did not have a Will in place”

The benefits

The major benefit of making a Will is that the deceased’s estate is distributed in accordance with their wishes.

If no Will is in place, then the rules of intestacy apply. These rules may not always reflect the deceased’s wishes and may leave the family and dependents in a difficult situation.

If you have minor children, you will need to make a Will, as a Will is the only way to nominate guardians.

A number of people have children from different relationships and very often have step-children, so a Will is particularly important to ensure that an Estate is distributed correctly.

Certain business assets are not liable to Inheritance Tax, and a valid Will can ensure that these assets pass to the appropriate beneficiaries, to reduce the burden of Inheritance Tax.

Existing Wills

“1 in 8 had not reviewed their Will for more than a decade”

It is extremely important to make sure that your Wills are kept up to date and reflect your current circumstances and wishes. A Will is still valid after a divorce, only a marriage will automatically revoke a Will.

Lasting Powers of Attorney (LPAs)

This legal document allows one to appoint someone that they trust as an ‘attorney’ to make decisions on their behalf.

This becomes extremely important if you lose the capacity to make decisions, so they can be made on your behalf.

If you would like more information on Wills or Lasting Powers of Attorney, please call Ward Williams Financial Services in Weybridge  on 01932 830664 for an informal discussion, or to book an appointment with one of our highly qualified financial planners.