Having taken the risk and side-stepped the typical job route to become a tech entrepreneur and wealth-creator, its a good job that there are still some tempting UK tax incentives out there to support you.Here are just 7 tax ideas or tips that you should be thinking about for your start-up business:
Entrepreneur’s Relief – if you hold 5% or more of the shares in your company for 12 months and work as an officer / director or employee, then when you sell the shares your effective tax rate will be just 10% on the gain. This is limited to the first £5m of gain over your lifetime. Sure beats an income tax top rate of 50%! Make sure you take this into account when setting up your company to ensure founders (and key employees) maximise this essential tax relief – theoretically 20 founders / employees could collectively shelter £100m of gain at the 10% tax rate. Conversely, you or your key team would be gutted if you unwittingly held just 4% of the shares!
R&D tax credits – get rewarded by the tax-man for innovating in your sector by claiming this lucrative tax relief. Many entrepreneurs mistakenly believe that this tax incentive relates solely to industries where scientists wear white laboratory coats but this couldn’t be further from the truth. This relief applies across industries – the tech sector, in particular. I recently secured a £10k tax refund for a tech startup that had been (wrongly) advised by its accountants that it wouldn’t qualify for this relief! Most repayments are processed by HMRC within 30 days of a claim and you only have 2 years to make a claim before you’re time-barred. Don’t leave this cash on the table.
Enterprise Investment Scheme – angel investors and private individuals are incentivised to invest in (perceived) higher risk investments like early stage private start-up companies with tax breaks like the Enterprise Investment Scheme (or EIS as its more commonly called). There is insufficient space here for the exact detail suffice to say that many tech or digital startups would fall within the qualifying criteria thereby allowing smart investors to reclaim 20% income tax relief subject to certain limits. For now, simply be aware that this tax break is out there to tempt investors.
Temporary National Insurance (NIC) Holiday – for new businesses there is a temporary NIC holiday for the first 10 employees limited to £5,000 per employee or £50,000 overall. The scheme officially kicked off in September 2010 and runs until September 2013. It is location specific with most of the South East of England barred so you need to check qualifying locations. So now is a good time to start building your team.
Get paid at mouthwatering effective tax rates compared to most employees – once you get past the pre-revenue stage and start making profits, shareholders of small companies have the flexibility to structure their remuneration package to optimize take-home pay. Why pay up over 20%, 40% or even 50% income tax and incur potentially huge National Insurance costs on employee salaries when you can pay yourself a combination of a small salary, dividends (and pension contributions) which, if carefully managed, can result in significantly higher take-home pay.
Get 100% tax relief on your new equipment – so you need to invest in new netbooks, laptops, servers and other gadgets for your business. You can claim 100% tax writing down allowances (‘Annual Investment Allowance’) against profits on your ‘first’ £100,000 of capital expenditure each year – this will be reduced to £25,000 with effect from 1 April 2012, although this downgrade should not adversely affect the majority of growing tech businesses.
Patent innovation box – coming soon will be a ‘patent box’ which will allow income or profits on registered UK patents to attract lower company tax rates of 10% (as opposed to a current lowest corporation tax rate of 21% or 20% from next April 2011). Bad news is that it is likely to be 2013 before this new tax break sees the light of day.
Remember, this is just a handful of the incentives available for smart and well advised tech entrepreneurs to help build tomorrow’s successful UK businesses.