Yesterday saw the formal launch of the Regional National Insurance Contribution (NIC) holiday for businesses started between 22 June 2010 and 5 September 2013.

This tax incentive announced in the June 2010 Emergency Budget allows for a 12 month break from paying employer’s national insurance contributions (currently 12.8% going up to 13.8% from 5 April 2011) on the first 10 employees.

The relief is limited to £5,000 per employee (so £50,000 in total) although it is difficult to foresee in practice how the majority of startup businesses will obtain full benefit for this relief given that new recruits would have to be paid approx £45,000 each to trigger a £50,000 employer’s national insurance liability?

It’s a welcome tax saving all the same to encourage new business start-ups (particularly in the North West), although there are plenty of points to watch – here are just a handful:

NIC holiday points to watch:

• You must apply for relief under this scheme – it is not an automatic entitlement. You can apply in paper or online.
• Business start-ups qualify for the first 10 employees recruited during the initial 12 month period. The “initial period” begins on the day the new business commences trading or the date on which the first employee is recruited, whichever is earlier – this cannot be before 22 June 2010.
• Each qualifying new employee receives a 12 month “holiday” provided this period does not cross the 6 September 2013 end date.
• ‘Principal place of business’ determines whether your startup qualifies for the relief. Certain geographical areas do not qualify (mainly London and South East) but you can foresee situations where this may not be clear (even though the guidance suggests otherwise) – there is, however, a Region Finder search tool available to assist. For example, those tech businesses that are primarily online or virtual, HMRC will look to where your books, records and equipment are kept. For those that seem to be split fairly evenly between UK locations, then HMRC will look to where the head office is as a key indicator of location.
• In addition to sole traders, partnerships and companies, property investment businesses and charities are also included as qualifying. Managed service or IR35 income companies do not qualify.
• Employer’s Class 1 national insurance contributions can only be withheld from the date of official launch i.e. 6 September 2010. Businesses started before this date cannot claim relief from employer’s national insurance until post 5 September 2010.
• Those new employees paid less than the employer’s national insurance threshold (currently £110 per week) still count toward the 10 employees even if there is no monetary saving for the new business. Similarly, part-time and casual staff individually count for the 10 employees limit - this provides an opportunity for planning with respect to the order of recruits i.e. ideally recruit senior / management team first (the Business Link guidance specifically states that if more than 10 employees join at once then you are free to choose which ones count toward the 10 employee limit).
• Anti-avoidance legislation is in place to prevent existing businesses from ceasing and restarting substantially the same activities within 6 months to take advantage of the scheme.
• Class 1A NIC on benefits in kind are unaffected as are the normal monthly employee NIC deductions which must be paid over in the normal way.
• You must retain the letter or email from HMRC that authorises you to operate the NIC holiday scheme.
• The NIC holiday scheme is not yet law. The relevant law should be passed around January 2011 so businesses have a choice - either apply now and risk banking the savings (if the law is not passed the employer’s NIC will be due and payable on 19 April 2011) or wait until the law is passed and apply for a refund for the intervening period

HMRC have prepared a flexible form to help calculate and monitor the amount available to withhold under this scheme.

So what appeared to be a straightforward initiative to promote much needed UK startups proves to be a little more tricky in practice although, with a little advance planning, this incentive should provide at least some tax cash savings for new businesses during their tricky first year of trading.

The above information is for educational and entertainment purposes only. It does not constitute professional advice. Please seek advice specific to your circumstances and particular facts. You can contact me if in doubt.

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As a partner accountancy firm with Xero, it was good to welcome Hamish Edwards (co-founder of Xero) to our offices today to talk about this online cloud based accounting solution and how it can further benefit our fast growth SME clients in Manchester and across the North West.

Having enjoyed talks with Rod Drury (Xero co-founder and CEO) and Gary Turner (UK MD) it was interesting to hear Hamish’s perspective on the vision for Xero given that he is a Chartered Accountant with his own successful accountancy practice (Openside) in New Zealand.

Hamish focused on the increased value role of accountants as “Virtual FDs” via Xero with the ability to access clients’ accounting records in realtime in order to provide timely, proactive accounting, financial and tax advice rather than just dealing with the traditional year end reporting compliance work – this is a crucial practical and mindset change for accountants that is long overdue.

Hamish also talked about “collaboration” as a cornerstone of Xero and the key benefits such as the clear and easy to follow dashboard, live (and growing range of) bank feeds and fantastically intuitive bank reconciliation process.

I am both optimistic and excited about what the likes of saas based Xero technology might mean in terms of accelerating the flow of knowledge and information between accounting firms and clients (versus the curse of traditional knowledge silos). Put another way, there is a whole raft of valuable knowledge available in accountancy firms that is often never fully leveraged because it is perceived to be either “too early” or “too late” or “not quite right now” to discuss with a client. This timing issue can hurt both clients and accountancy firms and results from a widespread and enduring tendency to build the relationship around year end reporting – due in no small part to the lack of ongoing visibility of the accounting records.

We work hard to meet up with our clients at regular intervals for planning meetings and trading updates but I can see technology like Xero being a great enabler for us to work much more closely in the future. Better for us, better for our clients.

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• A Xero day update (accmanpro.com)
• Accounting in the Cloud – Different Perspectives on the Same Data (diversity.net.nz)

As business owners, we sometimes struggle to clearly convey our business message to potential customers e.g. exactly what benefits we can bring or what pain we can alleviate?

In a noisy marketplace we can’t afford to miss selling opportunities – which makes effective communication skills increasingly important.

Fortunately, Andrew Thorp has come to the rescue in the North West with his series of Speakeasy events which aim to help entrepreneurs and business owners hone their business message.

Andrew released a short free ebook fairly recently called The A-Z of Persuasive Communication which is a good incisive read capturing many of the key learning points.

Armed with these tips you’ll feel more focused, confident and ready to get out there to speak to potential new clients and targets.

I couldn’t help but sit down this afternoon to reflect on the sheer complexity of our UK tax code and how it is virtually impossible to advise on specific commercial matters in isolation.

This followed a meeting I’d had with an entrepreneur earlier in the day to discuss future strategic plans and tax planning opportunities, initially aimed solely at the family owned business being as it was fast approaching the company’s year end – although the discussion rapidly spread across other diverse areas of business and personal taxation as these meetings so often do…

For example, one moment we were discussing whether a building should be acquired by the owner’s company, pension fund or personally and the next we were discussing the optimum tax mix of salary, dividends and director’s loan account draw-down. In the midst of this we touched upon maximising VAT recovery on the potential property acquisition, the hideously complicated anti-forestalling regulations in relation to pension contributions and making best use of capital allowances on some machinery. Oh, and we also discussed benefits in kind on a car and how this could be mitigated by use of the LLP in the group structure plus some possible R&D tax credit claims available in the future.

Tax typically has a knock-on effect to other taxes so no sooner than you think you have a potential solution to a problem then something else rears its head in the discussions and puts the brakes on – often VAT! – before we switch gears and head off in the direction of an alternative solution.

For me this is the really enjoyable aspect of being a tax advisor (there are some, honest!) – the chance for a bit of mind-gymnastics – although the investment of time in keeping up to speed with legislative changes and latest ideas is on the increase (this is without taking into account the depth and breadth of experience and expertise that we have in our Firm).

This is leading me to experiment with new ways of capturing, interpreting and disseminating tax information and planning ideas whilst maintaining a holistic approach to tax planning for each entrepreneur’s specific facts and circumstances. More to follow…

I was asked by a client yesterday whether I thought the UK R&D tax credit system would be around for the foreseeable future?

I answered “Yes”. Here’s a summary of my current thinking:

• James Dyson‘s Ingenious Britain Report, as commissioned pre-election by the Conservative party into re-energising the British economy, gave the UK R&D tax credit system a whole-hearted thumbs-up – in fact, he recommended that this valuable tax incentive should be further enhanced for innovative high tech UK small companies;
• The Tories pledged to push forward with a planned review of the taxation of intellectual property this Autumn. The Coalition government is keen to make the UK tax regime one of the most competitive in the G20 and to do so demands a well structured and favourable tax framework for intellectual property – otherwise big multi-nationals look to move their prized assets i.e. their intellectual property (IP) to a more favourable tax jurisdiction and worse, our home-grown talent (- export value – jobs) can be tempted to follow suit;
• The Autumn review of IP tax is also expected press forward on plans to introduce a new patent box to tax income derived from intellectual property at a lower corporation tax rate – a tax incentive already enjoyed by our Dutch neighbours for example, so it is good to see that UK resident companies should enjoy similar tax benefits in the near future;
• Generally there appears to be a growing understanding and acceptance (echoed from all political parties: from Alistair Darling to George Osborne to Vince Cable) that the most viable opportunity for rebuilding a long-term sustainable UK economy is to invest in building first class hi-tech innovative and intellectual property rich companies that can export their valuable know-how globally. A recent Nesta report on Rebalancing the UK economy is well worth a read in reaffirming this perspective. In essence: we don’t necessarily have to make the stuff but we can develop the ideas, know-how and proprietary IP for global manufacturers, distributors and retailers to license and sell!

On the negative side:

• there was a momentary concern in the final stages of the election that the Conservatives would drop the R&D tax regime if elected when they pledged to reduce the headline corporation tax rate and “simplify the corporation tax regime” – could this have meant the death of the R&D tax scheme and other valuable incentives such as capital allowances? (although this proved not to be the case in the Emergency Budget).
• The Coalition government also put a stop to proposals to introduce a video games tax relief which appears at odds with a perceived overarching aim to focus entrepreneurs on building IP rich digital and technology businesses.

So there have been some wobbles but fingers crossed these are isolated lapses (as a side-note I really hope the gaming tax relief proposals get back on the cards very soon).

What are your thoughts on the future of UK Research and Development tax credits?

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• Guest post: The budget is a win for startups (eu.techcrunch.com)
• Minister to pledge gaming support (bbc.co.uk)
• Tough Times Spur Shifts in Corporate R&D Spending (businessweek.com)
• MSP and TIGA Welcome Announcement of R&D Tax Credits Review (gonintendo.com)

I’ve long been a fan of Fred Wilson’s blog (‘A VC’) – if you’re a start-up entrepreneur or business owner you really should subscribe too.

The above video is a great snap-shot of the benefits of blogging in business. The gist of Fred’s words:

“blogging allows for the opportunity for VCs to enter into a dialogue with entrepreneurs over a period of time…to get to know one another…well before an investment decision needs to be made”

It is only fairly recently that such tools have become widely available and this has sooo much potential for every business owner and adviser.

We all now have the opportunity to demonstrate our approach to business thinking and to get to know one other (virtually) over a period of time before potentially entering into a (real-world) business relationship or project in the future.

Its all a bit like online (business) dating – but perhaps far more likely to find the right match over the longer term than traditional – yet speculative – business networking and marketing!

What are your thoughts on business blogging?

Its interesting to see HM Treasury being sufficiently forward thinking to ‘crowd source’ for cost saving ideas. This Spending Challenge initiative enters its second stage today in which the general public are invited to vote upon the 44,000 ideas submitted.

If HM Treasury can tap into this wisdom of the crowds, could your business be doing more to listen, learn and shape new ideas?

When considering purchasing that shiny new MacBook, desk, printer etc (or pretty much any other capital item) for use in your business, you should think about how you can get the best tax result (as well as considering the best model and price).

Purchased computer equipment, furniture and other plant & equipment is not simply deducted from your profits for accounts and tax purposes. Such items are treated as ‘fixed assets’ in your business accounts and depreciated over their useful economic lives e.g. a £600 laptop might be written off against your business profits over say 3 years (at £200 per year). But tax doesn’t necessarily follow this treatment – that would be far too straightforward!

The Capital Allowances tax regime governs the UK tax treatment of fixed assets in order to provide a degree of uniformity given that depreciation policies can differ between different companies.

The good news is that the capital allowances regime has been significantly simplified over the past few years for the majority of UK businesses. Since 2008, the Annual Investment Allowance (AIA) was introduced which allows businesses (except LLPs) to deduct expenditure up to a certain amount each year from taxable profits in Year one ie 100% tax write off immediately against profits.

The AIA originally started at £50,000 per annum, then went up to £100,000 with effect from 1 April 2010 for companies (5 April 2010 for unincorporated businesses) although it has recently been announced that this will decrease to £25,000 from April 2012.

A key tax planning point therefore is to accelerate planned future significant capital expenditure before the capital allowance rates decrease in 2012.

Care needs to be taken in applying these limits in periods where the limit has changed e.g. a business with a 31 December 2010 year end would need to pro-rata the AIA limit given that the allowance changed from £50,000 to £100,000 with effect from 1 April 2010 for companies.  The entitlement is broadly £87,500 AIA for a 31 December 2010 year end, however, some nifty legislative drafting ensures that companies that may have already invested the full £50,000 before the 1 April 2010 (as it otherwise would have been permissible pre the Budget announcement) are not unfairly penalised.

Note that cars are not eligible for the AIA – although there is a some simple tax planning available to fund car purchases with significant tax relief, but I’ll leave that for a future post…

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As always the above information is for guidance and educational purposes only and does not constitute professional advice. Please seek professional advice specific to your facts and circumstances (as tax law can be pretty complex and changes fairly frequently!).

Here’s a round up of the key digital, tech and creative business north west news that caught my eye this week:

Fun story about two NW teenagers who have managed to solve a problem related to bus timetables by developing a mobile app within a matter of weeks and on a shoe-string. Even better (or not?) is that Greater Manchester Transport Passenger Executive hadn’t managed to solve this problem despite having a £259m budget! Exciting possibilities…

Good to see NW digital agencies holding their own on high profile national projects with news of the recent contract win by Loaf Creative to provide the England team with digital content for individual and commercial supporters for the World Cup 2018 bid. Well done guys!

Congratulations to How-Do on their recent move to city centre offices in Manchester - welcome.

Best reads of the week:

Emerging companies launching in a recession – a good article from The Drum on the recent increase in digital startups with insightful comments from NW digital and creative entrepreneurs who have been there and done it before. Interesting to note how the complexity and red-tape around getting the business off the ground is drawn out as a particular issue – something BusinessN2K.com is keen to address!

Social Media and common sense – a simple guide how – straight talking and valuable advice for all from social media newbies to veterans by Ned Poulton from PushOn.

Forthcoming digital NW events:

Techcelerate Late Summer BBQ

15 September 2010 – Kicks off from 5.30pm at Atlas Bar, Manchester

BVCA Financing and Funding the Digital Age

16 September 2010 – All day event at Lowry Hotel, Manchester 

Beyond 2010 – Harnessing the influence of Social Media (How-Do)

20th September (9am – 5pm), The Point, Lancashire County Cricket Club

It was nice to be quoted in today’s North West BusinessDesk.com (registration required) on why now might be a good time for entrepreneurial business owners to consider selling or exiting their business. I thought it might be useful to expand on this short published article.

You may have heard in the fairly recent Emergency Budget that the 18% flat tax rate on capital gains was increased to 28% for higher rate tax payers with effect from 23 June 2010 – the higher rate tax kicks in where total income, including capital gains, exceeds approx £43,000.

So does this mean that you might suffer tax at 28% on the gain if and when you come to sell your business?

For most hands-on digital entrepreneurs the answer should be “No”. On the sale of your business, you should (subject to the qualifying conditions below) qualify for Entrepreneurs Relief which provides a preferential tax rate of just 10% on capital gains crystallised on lifetime gains up to £5m.

Compare this with the current super tax rate of 50% for earned income in excess of £150,000. The difference between capital gains (as suffered on the sale of a business or shares in a company) as opposed to earned income is absolutely critical!

Further, the June 2010 Emergency Budget made Entrepreneurs’ Relief even better by increasing the lifetime allowance from £2m to £5m (saving a potential additional £540,000 of tax) so it is vitally important that you structure your business to take maximum advantage of this valuable tax break.

Key qualifying conditions for entrepreneur’s relief to apply to the sale of shares in your company:

• You must hold at least 5% of the ordinary shares and voting power
• It must be a trading company (most digital, tech and creative businesses would satisfy this condition)
• You must be an officer or employee of the company
• You must hold the shares for a minimum of 12 months prior to sale.

So based on these conditions, 20 employee shareholders could theoretically shelter a gain of £100m taxed at just 10%!

It is vitally important therefore that you consider the following potential opportunities and pitfalls in structuring your company shareholdings and arrangements to secure entrepreneur’s relief:

• % of shares awarded – you would be seriously peeved off if you were awarded 4% of the shares and voting power if, with a little advance planning, an additional 1% could have saved you approx £800,000 in tax if the business ultimately sold out for c£100m – this is a key issue for founders to consider plus for incentivising key management
• rights attached to the shares – what if you were awarded 10% of the shares of a class that held no voting rights and then found out years later on exit that you were subject to tax at 28% when your colleagues paid tax at just 10% because they all had voting rights (you didn’t think this minor omission was all that important at the start…)?
• duration of the shareholding – many tax advantaged share schemes such as HMRC approved Enterprise Management Incentive schemes (EMI) used to be more valuable as, not only do they allow you to pick and choose who will be awarded share options, they also allowed for the lowest capital gains rates of 10% under the old CGT regime in pretty much all cases. Not necessarily now… Most EMI schemes are structured such that the options are exercised at the point of a sale of the company or exit, however, if this pattern of facts unfolds you would not have held the shares for the necessary 12 months. You would fail the test. You would have had to have exercised the share options and acquired the shares 12 months before the deal to qualify for entrepreneur’s relief (this assumes that you had the cash to fund the share acquisition which is often a practical difficulty in itself)
• role of shareholders – there is no requirement to work a specific minimum number of hours or hold a particular post but to qualify you must formally hold a post within the company, either as an officer or employee. Non-executive directors should qualify so long as they are formally engaged – but what does this mean for many angel investors? Also, consider advance planning if you are a husband and wife company – shares can be transferred between a husband and wife (or civil partnerships) without triggering a taxable capital gain so it is sensible tax planning to consider transferring a minimum of 5% of the shares as soon as possible and ensuring that the recipient spouse carries out some role (with a title) in the business.

The key tipping point for shareholders is on gains exceeding £7.5m as this is the point at which the hike in tax rates from 10% to 28% (as opposed to 18%) but compensated for the increase in lifetime allowance to £5m (from £2m) really bites.

Although this is splitting hairs for most entrepreneurs as getting the most out of your business at the end given all the blood, sweat and tears suffered in building it is absolutely paramount. So don’t risk leaving it until you (and your team) are sitting on a capital gain of £8m+ before you start thinking about this stuff. Fancy a coffee?

The above information is for educational and entertainment purposes only and does not constitute professional advice. Please contact me if you would like to discuss factors specific to your circumstances or discuss with your professional adviser.

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