Top 5 Tax Reliefs For Startups
Many start-ups and growing businesses choose to work in a co-working space so they can become part of a vibrant community alongside other entrepreneurs. Co-working spaces provide many benefits to start-ups such as flexibility, networking opportunities and spaces that work to their needs.
For many start-ups and growing businesses, there can be a lot of uncertainty surrounding tax and often businesses end up paying more tax than they need to. New businesses can benefit from a range of tax reliefs and allowances.
Out tenants Accounts Lab have put together the top 5 tax reliefs for start-ups:
1. The Seed Enterprise Investment Scheme (SEIS)
The SEIS is a government-backed scheme that is designed to help new businesses raise equity finance. The scheme offers tax efficient benefits to investors for investing in small and early stage startup businesses in the UK. The aim of the SEIS is ‘to stimulate entrepreneurship and kick start the economy’.
SEIS investors can invest a maximum of £100,000 in a tax year (this can be spread over more than one company). The investor can then receive up to 50% tax relief in that tax year in return for the investment. Investors must not hold more than a 30% stake in the company and they cannot control the company receiving their investment. A company may qualify for the SEIS if it meets the following requirements:
- The company is based in the UK and has a permanent establishment in the British Isles.
- The company has fewer than 25 employees.
- The company is no more than 2 years old.
- The company has assets of less than £200,000.
- The company trades in an approved sector – generally not in finance or investment
A company can not raise more than £150,000 in total from SEIS investment.
The first step to taking part in the SEIS is to apply for SEIS Advance Assurance. This is an indication from HMRC that an investment in a company is SEIS compliant. This can be shown to potential investor by the start-up company to give them assurance that their investment should be eligible for tax reliefs. This therefore makes the investment opportunity more attractive to potential investors. The form to apply for SEIS Advance Assurance is the EIS-SEIS(AA) however many accountants such provide this service.
2. The Enterprise Investment Scheme (EIS)
The EIS is like the SEIS in that it is designed to help companies raise money and grow their business. The EIS does this by offering tax relief to individual investors that buy new shares in the company.
Under EIS companies can raise up to £5 million in a year and a maximum of £12 million in their lifetime. An investor can invest up to £1,000,000 per year in qualifying companies. Tax relief of 30% can then be claimed on their investments. A company may qualify for the EIS if it meets the following requirements:
- The company is established in the UK.
- The company isn’t trading on a recognised stock exchange at the time of the share issue and doesn’t plan to do so.
- The company doesn’t control another company other than qualifying subsidiaries.
- The company isn’t controlled by another company or doesn’t have more than 50% of its shares owned by another company.
- The company does not have gross assets worth more than £15 million before any shares are issued and not more than £16 million immediately afterwards.
- The company has fewer than 250 full-time equivalent employees at the time the shares are issued.
- The company must carry out a qualifying trade.
The money raised by the investment must:
- Be used to grow or develop the business
- Be spent within 2 years of the investment, or if later, the date you started trading.
- Not be used to buy all or part of another business.
- Be used for a qualifying business activity, which is:
- A qualifying trade
- Preparing to carry out a qualifying trade (this must start within 2 years of the investment)
- Research and development that’s expected to lead to a qualifying trade.
Like for SEIS you can also apply for EIS Advance Assurance which you can then show to potential investors to give them assurance that their investment should be eligible for tax reliefs and therefore make the investment opportunity more attractive. You can apply for both SEIS and EIS Advance Assurance at the same time using the EIS-SEIS(AA).
3. Research and Development (R&D) Tax relief
Research and Development (R&D) Tax Credits are a government tax relief with the aim of encouraging companies to invest in Research and Development.
If your company is spending money on developing new products, processes or services; or changing or modifying an existing one, they may qualify for R&D Tax Relief. The work must be part of a specific project to make an advance in science or technology, but this cannot be within a social science or a theoretical field such as pure maths. The project must relate to your company’s trade. This could either be an existing trade or one that you plan to start up based on the results of the Research and Development.
To qualify for R&D Tax Credits you need to:
- Show that you looked for an advance in the Science and Technology field – not just an advance for your business.
- Show how you had to overcome uncertainty – your project should be something that isn’t known to be scientifically or technologically feasible when you make or discover it.
- Explain how you tried to overcome this uncertainty – this can be a simple description of the successes and failures you had during the project.
- Show how the project couldn’t be easily worked out by a professional in the field – you can do this by showing that other attempts to find a solution had failed.
Small and medium sized companies with less than 500 staff members and a turnover of under £100m can claim Small and Medium Sized Enterprises (SME) R&D Relief. This allows them to deduct an extra 130% of their qualifying costs from the yearly profit as well as the normal 100% deduction. They can also claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss.
Large companies can claim a Research and Development Expenditure Credit (RDEC) for working on R&D projects. RDEC can also be claimed by SMEs and large companies who have been subcontracted to do Research and Development work by a large company. The RDEC is a tax credit for 12% of your qualifying R&D expenditure.
4. Entrepreneur’s Relief
Entrepreneur’s relief is a scheme that applies to individuals who are either a sole trader, member of a business partnership, or a limited company shareholder in a trading business. These individuals will qualify for Entrepreneur’s Relief if they dispose of any of the following:
- All or part of their business as a sole trader or business partner (including the business’s assets after it closed.
- Shares or securities in a company where they have at least 5% of shares and voting rights (known as a ‘personal company’)
- Shares they got through an Enterprise Management Incentive (EMI) scheme after 5 April 2013.
- Assets they lent to their business or personal company.
If the individual qualifies for Entrepreneur’s Relief, they will pay tax at the reduced level 10% on all gains on qualifying assets.
If you’re selling all or part of your business, the following must apply:
- You’re a sole trader or business partner
- You’ve owned the business for at least one year before the date you sell it.
If you’re selling shares or securities, the following must apply for at least 1 year before you sell your shares:
- You have at least 5% of shares and voting rights in the company – if they’re not EMI shares.
- You were given the option to buy them at least one year before you’re selling them – if they’re EMI shares.
If you’re selling assets you lent to the business, the following must apply:
- You’ve sold at least 5% of your part of a business partnership or your shares in a personal company.
- You owned the assets but let your business partnership or personal company use them for at least one year up to the date you sold your business or shares – or the date the business closed.
5. Enterprise Management Incentive (EMI) Share Scheme
The Enterprise Management Incentive (EMI) is a tax-advantaged share option scheme designed for smaller companies. It was introduced in 2000 to assist growing companies in attracting and retaining key employees and to reward those employees for taking the risk to work for such companies.
If a company has assets of £30 million or less, it may be able to offer Enterprise Management Incentives (EMIs). If the company is eligible it can grant employees share options up to the value of £250,000 in a 3-year period. The price of the shares under option is fixed when the options are granted and notified to HMRC.
If an employee buys thee shares for at least the market value they had when they were granted the option, they won’t have to pay Income Tax or National Insurance.
If the employee was given a discount on the market value, they’ll have to pay Income Tax or National Insurance on the difference between what they pay and what the shares were worth. They may also have to pay Capital Gains Tax if they sell the shares.
If a company works in an ‘excluded activity’, they aren’t allowed to offer EMIs. Excluded activities include:
- Property development
- Ship building
- Provision of legal services
As a start-up or growing business, the above tax reliefs can help your business grow and succeed.
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