A key requirement of EIS (Enterprise Investment Scheme) relief is that the funds invested are ‘employed’ within the investee business within the requisite time. The current requirement is that 100% of the funds must be invested within 2 years in the qualifying trade.

But how can a company ensure that it can demonstrate that it has fulfilled this requirement?

It is commonly advised that companies maintain a separate bank account for the EIS funds received. This way the company can maintain a record of both the timing and nature of the expenditure to which the EIS funds have been employed. There has never been a problem with EIS funds being used for working capital requirements – in fact, advisers have often recommended that funds be utilised for working capital requirements in priority to other funds if there was a risk that the funds might not otherwise be invested in time – however, a recent court case has added a layer of complexity to this commonly accepted advice.

The recent Skye Inns case was decided against the taxpayer on the grounds that a proportion of the funds was not invested within the required time limit. This was despite the fact that a separate bank account was maintained. The company was faced with a difficult decision in that a particular investment fell through shortly before the time limit for investment of the EIS funds was set to expire. The company therefore tried to argue that the funds had (largely) been utilised in servicing working capital demands instead. The appeal court decided, however, that the ongoing trading income of the investee business should be considered for servicing working capital in priority to any EIS funds. On this basis, HM Revenue & Customs won the appeal and the EIS relief was denied for the taxpayer.

It is key therefore that EIS subscription monies are earmarked in the relevant period for a specific current or future trading requirement rather than simply dipping into the EIS account, as necessary, and relying on a first in / first out (FIFO) basis to favour EIS funds over subsequent trading income. As ever, the paper trail will be key in ensuring that relief is not denied.

Related articles

• Call for more tax relief for angels (telegraph.co.uk)

HMRC has announced today a pilot scheme to assist small companies in making their first Research and Development (R&D) tax credit claim.

Small companies for these purposes are companies with fewer than 50 employees – so still fairly sizeable in actual fact.

The idea is that participants will be allocated an R&D tax contact from HMRC who will assist the company in putting together a claim and agree a basis for the next two years’ claims provided that they follow the same basis.

This is great news for small companies or startups who would like advance assurance before commencing work in compiling and filing an R&D claim, however, we’ll have to see how this works in practice. For example, in terms of

• is there sufficient HMRC resource to commit to individual company claims (they are already stretched); and
• I hate to be cynical but there has to be a question mark over HMRC’s incentive to help companies maximise claims or explore angles or more obscure claims that might not be immediately apparent.

The sorts of issues and technical matters that you would hope your accountant or tax advisor is already doing for you.

There has been this ongoing problem for companies that are solving technological or scientific uncertainties (and therefore,on the face of it, qualify for research & development enhanced tax relief) yet the product that emanates from this R&D process is ultimately sold to a customer e.g. a prototype that is sold rather than skipped.

HMRC’s view has been that if the product was sold it must represent excluded “production” activities rather than a qualifying R&D process and therefore cannot be qualifying expenditure.

The thinking here is that the R&D tax credit exists to encourage investment in the advancement of scientific or technological knowledge where there is no alternative market driver so, on the flip-side, if there are customers willing to purchase the fruits of your labour then why do you need the tax credits? But this analysis does not stand up to economic scrutiny for 99% of SMEs; in that you may not have known how to achieve what you ultimately created but, if you are successful, why on earth would you want to dump your invention or prototype in the skip if there happens to be a willing buyer?!!

The good news is that recent HMRC guidance has softened this approach. It is not a complete reversal of policy but rather an acceptance that there may be instances where costs of developing products do qualify for the R&D tax relief despite ultimate sale.

A key takeaway from this will be the heightened need for appropriate documentation to evidence when the qualifying R&D ceased and excluded “production” activities commenced.

An improvement to this tricky area – yes – but does this go far enough? How might this impact on your company’s R&D activities and future potential claims?

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If your UK business start-up was set up on or after 22 June 2010 then you may be eligible for a 12 month holiday from employer’s national insurance contributions – normally payable at a rate of 13.8% on employees’ and directors salaries in most cases.

This incentive, aimed at boosting the number of business startups in certain areas (like the north west), has been around for over a year now but many new businesses still seem to overlook it.

We are busy saving new businesses up to £50,000 so it is well worth looking into further if you think it might apply to your new business. Drop me a line if you would like to enroll for this NIC holiday or if you would like to ask any specific questions.

Current tax rules require shareholders to be officers or employees of a company and hold 5% of the ordinary shares (and voting rights) for a 12 month period prior to sale to qualify for the holy grail of entrepreneur’s relief (ER) – ER results in a 10% personal capital gains tax rate (CGT) as opposed to a top rate of 28% CGT which is worth a potential £1.8m in tax savings.

I am currently encountering 3 common problems related to this condition in advising fast growth tech companies:

1. Founders are seeing their equity being diluted as they approach much needed successive investment rounds and may therefore find themselves sinking below the 5% threshold - what adverse impact might this have on the funding decisions of business founders?
2. You need to hold the 5% minimum requirement for 12 months prior to sale – what about employee shareholders who exercise share options just prior to sale (because that’s all the share option scheme permits)?
3. What if a Founder is willing to share equity with a number of key employees (and reach the 5% threshold in each case) but is unwilling to relinquish voting rights? Especially if say 5 or more shareholders are given 5% each thereby breaching the 75% ownership limit necessary for passing special resolutions? Although this can often be managed via a shareholder agreement, some founders may be unwilling to enforce their (perceived) rights by suing for breach of contract.

Clearly, any tax incentive worth a potential £1.8m requires conditions and safeguards but it is disappointing when these conditions lead to skewed and sometimes uncommercial decisionmaking.

What changes or improvements would you like to see made to entrepreneurs relief?

1st April is an important date for UK companies as it signifies the start of a new tax year (yes, the personal tax year is different running to 5 April each year) and there have been some important announcements made in recent Budgets. Here are the headlines:

1. Small companies rate of corporation tax falls from 21% to 20%.

2. Standard rate of corporation tax falls from 28% to 26% (applies broadly to stand alone companies with taxable profits of £1.5m or more).

3. R&D tax credits increased from 75p enhancement for every qualifying £1 spent to £1 enhancement. If you haven’t considered whether R&D tax credits apply to your business it is well worth considering now.

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.

Aside from the minute detail behind likely tax changes and incentives that might emerge from today’s Budget announcement, there is one overriding wish that business owners repeat to me again and again and its a wish that I too share:

Stop tinkering and remove red-tape so that UK businesses can plan for the future with a degree of certainty

 I live in hope….

With a little less than 30 minutes to go until the Budget speech, I am looking forward to a pro-entrepreneur business set of proposals and actions to support growth for the future.

Looks like the Institute of Directors (IoD) are too with some of their proposals – here’s one in particular that I like:

Introducing an exemption from future capital gains tax for entrepreneurial investments. If a new company starts in business between now and 5 April 2012 then the people who subscribe for shares in it within that period would be exempt from capital gains tax when they sold those shares, whenever they sold them. This would encourage the injection of fresh equity capital into businesses (only shares subscribed for would qualify, not shares bought from existing shareholders).

If we want more private sector jobs then we need more private sector businesses.

How do you encourage entrepreneurs and business owners to take that capital risk? This is one good idea. Let’s hope George has plenty more up his sleeve!

Hmmh, so its this time each year (more than once per year in recent years) that accountants / tax advisers, like myself, scratch our heads and wonder how best we can inform our clients on issues relevant to them that emerge from the Budget speech.

This approach is constantly evolving – my plan for tomorrow’s Budget speech is to:

1. Tweet points of interest as they emerge during George Osborne’s Budget Speech on Twitter. I’ve used CoveritLive! in the past but fail to see exactly what this adds over and above using Twitter directly. Tweeting comments as the speech unfolds in realtime also allows me to take notes ready for blog posts to be drafted post speech.
2. Set up the hashtag #budget11 on Twitter to check for interesting conversations (and of course to keep an eye on the competition ) Also set up RSS feeds for “Budget 2011″ on Google for emerging news and commentary.
3. Download the Treasury Budget Notes from the HM Treasury website as soon as George sits down – the devil’s always in the detail! Usually, lots to digest.
4. Extract the key points relevant to my clients and targets and draft short commentaries as blog posts and separate client briefings. Post links to blog posts on Twitter and keep an eye out for feedback, comments, questions etc.

Then of course cascade and discuss points of interest directly with our clients – normally via a meeting or call.

This approach is a lot different to the approach in the past in which it was largely a ‘fact race’ to be 1st to clients and targets with a summary of the key points. The internet has blown this approach out of the water for all but the biggest and bravest. This, in my view, is no bad thing as the prize is now more about contextualising the issues relevant to clients and in looking at new ways of sharing this information with clients and prospects in ways that not only informs but also engages (both them and us).

Any thoughts, comments or observations on how we can better engage with businesses on issues emerging from the Budget speeches would be gratefully received…