Continuing with our detailed analysis of the tax planning opportunities that arose following the Budget 2012, we turn our attention to tax efficient investment opportunities. We already have VCTs and EIS, both of which we have covered in detail before. These were further enhanced in the Budget with a new scheme, SEIS (Seed Enterprise Investment Scheme), which is specifically aimed at start up companies.
Tax relief under SEIS started to become available on 6th April this year, although we are currently awaiting Royal Assent, and is expected to be available until at least April 2017. SEIS offers a more tax efficient way to invest in new ventures and, for the business owner, a useful way of obtaining finance for a new venture, up to a maximum level of £150,000.
How SEIS works
SEIS allows anyone who invests up to £100,000 in a tax year in a qualifying company to benefit from 50% income tax relief on the amount they have invested and, depending on their circumstances, to also benefit from full CGT relief. The income tax relief can either be backdated to a previous year or be given for the year the investment is made.
For investors, this represents another way to get 50% tax relief alongside pension contributions.
Qualifying criteria for SEIS
The rules, as relevant for different stakeholders involved in SEIS are as follows:
- The company must be a start up business (incorporated within 2 years of the date on which the shares are issued);
- It must be a UK company, not controlled by another company;
- It must not employ more than 25 workers;
- It must have assets of less than £200,000;
- It must trade in an approved sector;
- Certain industries and types of business are not permitted to raise finance through SEIS, including property development, farming or market gardening and those involved in the leasing industry;
- The total amount of SEIS investments made into the company must not exceed £150,000;
- Investors can invest £100,000 in a single tax year rising to a maximum of £150,000 over two or more tax years into a single company;
- Investors cannot own more than 30% of the company receiving their capital;
- The shares must be held by the investor for 3 years after they are issued;
- In the 2012/13 tax year, investors can roll any gain in the tax year into an SEIS with full capital gains tax exemption;
- Neither the investor nor his associates (e.g. business partners, parents, children) can be an employee of the company at any time from incorporation to 3 years after the shares are issued;
- All of the money raised by the investment must be spent by the company for business purposes within 3 years after the shares are issued;
Our verdict on SEIS
This is a more tax efficient scheme than EIS as 50% income tax relief is achieved; together with full CGT roll-over (i.e. there is no clawback of the gain rolled over when the SEIS shares are sold). However the amounts that can be raised by companies and contributed by individuals are severely restricted, making this scheme applicable for small start up businesses only. For those businesses however, it can help attract very valuable funding for growth in the early years. And although there are quite a few rules to navigate, this is a very useful scheme, which benefits investors and business owners alike.
For more information on investment related tax planning please contact Lesley Stalker by emailing las@rjp.co.uk.
April 30, 2012
There are a lot of changes afoot this year for business owners with the government planning plenty of new policies for employers. Taking a short break from tax issues, we outline some of those most likely to impact our clients.
Pensions
Although the government has announced that automatic enrolment legislation for pensions will start as planned for employers with more than 250 employees, smaller companies are being given more time. Organisations with between 50 and 249 employees are getting an extra year, and will need to start auto-enrolling employees between 1 April 2014 and 1 April 2015. Companies with under 50 employees will not have to auto enrol their staff for pensions until April 2017. (more…)
February 27, 2012
In last month’s Livewire newsletter, we reported a change to the ruling that shareholders informally winding up their companies can distribute any remaining funds as capital and depending on the circumstances, can also benefit from entrepreneurs’ relief.
With effect from 1st March, if the company concerned has distributable funds in excess of £25,000 all funds distributed will be treated as dividends and subjected to income tax in the usual way. This means tax will be payable at rates from 25% to 36% depending on the individual circumstances, rather than potentially at a rate of 10% if distributed as capital.
(more…)
February 23, 2012
It’s very rare that our blogs are in any way trumpet blowing, but this is something we are all really pleased about and, we think, well worth a mention on Taxtalk.
As one of the Surrey area’s leading local accountants and business software specialists, Robert James Partnership has been selected as a Platinum Partner for the Sage 50 suite by business software and services provider Sage UK.
(more…)
February 15, 2012
Exit strategy, succession planning, call it what you will; deciding what to do, and when, with your business to provide a secure future – possibly a retirement or the basis of a second career, is an issue all business owners face. And whether you are considering it because you feel the time is right to move on or step back now, or whether you’re planning ahead; as with all important business decisions forewarned is forearmed.
Whilst, a decade ago, business purchasers were aplenty and the banks had no problem providing the funds required to sustain a hungry M&A market, the recession means that things are now rather different. It is therefore useful to consider a variety options you might not have thought about before; for instance, how much deferred consideration you can afford to take, or whether a ‘partial exit’ may be an attractive alternative.
Indefinitely deferred consideration?
When selling in the good old days, many companies achieved a high goodwill value based on historic profits, and although in an ideal world most sellers preferred the total sale price to be paid in cash on completion, they regularly accepted a slightly lower payment initially and could also look forward to future lump sums paid at intervals in the form of deferred consideration.
Now, typically, the initial payment received on the sale of a company is far less, mainly because the borrowings available to the buyer are less, with a higher balance of the sale proceeds being payable in the future based on the future profits of the company (over which the seller typically has little, if any control). And of course, whilst the level of future profits, and hence the return on those profits is a concern, in the current economic climate, you also need to be sure your buyer is going to be around to actually make the payments. This is a very real issue today as future profits may be vulnerable if, for example, a major client goes out of business or indeed the buyer himself runs into financial difficulties.
If these issues are holding you back from a trade sale, then you might want to consider other alternatives that will give you the outcome you need without unnecessary risk and stress. These outcomes however require forward planning.
Partial exit might offer a win-win?
A partial business exit can be very attractive. It can bring new blood into the organisation whilst allowing you to take a back seat, explore other interests and ideally, enjoy some of the wealth you have generated. It can enable you to take part cash consideration and continue to enjoy a (reduced) level of income from the business – perhaps for helping out on a part time basis, helping with marketing or a smooth customer transition.
The key thing to bear in mind if you choose to take this route is the importance of ensuring continuity within the company both in terms of reassuring the current employees that your commitment is as high as ever and also by making sure that the team you bring in, whether through an MBO or entirely new blood, is up to the job and the process is managed as carefully and diligently as possible. It might also be an idea to retain a reasonable shareholding at the outset in order to reassure colleagues that you are not immediately diluting your own power too much.
Partial exit can give you the liquidity you need and offer a more flexible way to fund your lifestyle.
In order to decide on the best balance, you will need to consider the following:
1. How much time do you want to commit to the business after the sale? Work this out early so everyone involved knows what to expect – including you.
2. Your retirement is apt to go on a bit as we’re all living longer, so do the maths and make sure you’ll have sufficient income for your needs and those of your dependents.
If you are considering an external investor to finance a partial exit, one risk is the possibility that the dynamics of the business may change too abruptly. This can occur for instance if that investor is to be involved with actively running the company and for example, wants to exit in the medium term, having seen a return on his investment. Find a partner who shares your core values and has a good cultural fit with the business and who can take it to the next level while you enjoy some time to rest and relax.
Tax planning opportunities
Depending on how your company is structured and the nature of what is being sold, HMRC will either view the sale proceeds as personal income or capital gains, or a mixture of both, with the latter being taxed at a lower rate. Get tax planning advice and ensure you consider all aspects for you and your team, including entrepreneurs’ relief, gift relief, EIS relief and business property relief.
Grooming your team
If you go down the MBO route, an experienced and balanced team is critical, not just to the funding of the deal but to secure the future success of the business (and of course your future income!). No matter what role you intend to have after the sale, you must analyse the quality and balance of the team. Its skill-set should cover all key aspects of the business including sales, finance, marketing and IT. By ensuring that you groom the right team for the job well in advance and pass the business on to a robust and experienced line up, you are managing part of the risk associated with giving up control and putting your company in the best possible position for future success, hopefully enabling you to enjoy your retirement, or semi retirement without cause for concern.
So whether you sell up completely or partially to existing employees, agree a merger with a competitor or get an outside investor interested, it always pays to be aware of the options available well in advance.
Lesley Stalker is head of tax at RJP, contact her at las@rjp.co.uk
This blog has also been published by Real Business
October 26, 2011
HMRC recently announced that since their pilot exercise was so successful they are going to extend their Business Records Checks programme. It was inevitable it would be deemed successful, ‘Record checks’ are effectively a euphemism for ‘getting fast access to accounts to check for tax shortfalls’.
The pilot programme involved visits to SMEs to ensure that their business records were adequate. Around 44 per cent of businesses visited had ‘issues’ with record-keeping, while around 12 per cent of those visited had seriously inadequate records. (more…)
October 14, 2011
