Tax breaks for smaller companies

John Kingsley

Agenda

• How tax can help smaller companies

• R&D Tax Credits

• The Enterprise Investment and corporate Venturing Schemes

• Enterprise Management Incentives

How tax can help smaller companies

• Maximising cashflows

• Raising external finance

• Attracting, retaining and incentivising key employees

Maximising cashflows – Introduction

• Business taxes are a drain on limited resources

• Use the tax rules to maximise relief for expenditure and defer the payment of liabilities

• Consider the following areas:

• Pre-trading expenditure

• Voluntary VAT registration

• 100% Capital Allowances

• R&D Tax Credits

Maximising cashflows – R&D Tax Credits

• Available to SMEs carrying out qualifying R&D activities

• SME is defined in accordance with EU rules

• R&D under UK GAAP (Generally Accepted Accounting Practice)

• Emphasis on innovation/extension of scientific knowledge – not incremental improvements

Maximising cashflows – R&D Tax Credits

• Qualifying R&D expenditure of £10k or more per annum

• Includes staffing costs, software and consumables

• Eligible staff costs are wages/salaries BUT NOT benefits in kind

• Consumables include transferable materials, water, fuel and power

Maximising cashflows – R&D Tax Credits

• How much is the relief for SMEs?

• Two possible scenarios:

• “super deduction” of 150% (rising to 175% wef 1.4.08)

• Repayable tax credit

• Repayable tax credit is lower of:

• 16% of the ‘surrenderable loss’

• Total amount of the company’s PAYE and NI liabilities for the relevant accounting period

The Enterprise Investment Scheme (EIS)

• EIS provides Income and Capital Gains Tax reliefs to eligible investors (individuals)

• The individual must subscribe for ordinary shares in a qualifying company (see overleaf)

• The company’s shares must not be redeemable or carry preferential rights

• Each investor must subscribe at least £500 for new shares

The Enterprise Investment Scheme

• The investee company must be unquoted and trading

• Gross assets must not exceed £7/8m

• Less than 50 full-time employees when shares are issued

• Independence requirement – not controlled by another company

The Enterprise Investment Scheme

• Income Tax Relief : Max £400k @ 20%

• Capital Gains Tax : Exempt if shares held for 3 years or more

• Annual fundraising limit of £2m – applies to all ‘risk capital’ schemes

• EIS authorisation is obtained by the company on behalf of its investors

The Corporate Venting Scheme (CVS)

• Applies to corporate investors

• The detailed rules mirror those of the EIS

• Corporation Tax relief on monies subscribed for shares by the company and in respect of a loss on its investment

• Corporate investor can’t own more than 30% of the investee company’s share capital

Enterprise Management Incentives (EMI)

• An approved share scheme with many tax advantages

• Options over shares with maximum value of £100k

• Most trading companies should qualify

• Very flexible – employer company can set performance conditions to suit

Enterprise Management Incentives (EMI)

• No Income Tax on grant or exercise provided options awarded at market value

• Facility for agreeing share valuations with HMRC in advance

• Capital Gains Tax on eventual sale

• 18% CGT rates is still lower than highest Income Tax rate

• Corporation Tax deduction when options are exercised

Questions ?

• Baker Tilly UK Audit LLP, Baker Tilly Tax And Advisory Services LLP, Baker Tilly Corporate Finance LLP and Baker Tilly Restructuring And Recovery LLP are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountants in England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide.

• Baker Tilly & Co Limited is authorised and regulated by the Financial Services Authority to conduct a range of investment business activities.