Mark Eade highlights the tax incentives available for fast-growth businesses.
It's generally accepted that young, dynamic, fast-growing businesses are driving economic growth in the UK. So, what are the tax reliefs available to entrepreneurial businesses, their owners and investors?
R&D tax credits
A significant research and development (R&D) tax relief is available to companies engaged in creative or innovative work in the field of science and technology. R&D relief is, however, not just restricted to science and technology businesses. It is available to companies in virtually every industry undertaking some form of innovation.
SMEs can claim a 225% tax deduction for qualifying expenditure incurred after 1 April 2012. Even loss-making SMEs that have paid no corporation tax can potentially claim a repayable tax credit. From 1 April 2014 this credit is approximately 33% of the R&D cost. Larger companies are currently entitled to a 130% deduction on qualifying expenditure. There is also a 10% 'above-the-line' tax credit for larger companies to offset against the company tax liability.
Patent box
Since 1 April 2013, companies have been able to elect to phase in a reduced corporation tax rate for profits generated from qualifying patents and some other forms of intellectual property. The headline rate for patent profits is 10%. It was partially introduced in 2013 and will become fully effective from 2017 – although the effective rate is likely to differ from this and is subject to a complex underlying calculation.
SEIS/EIS relief
There are two schemes available for companies looking to raise equity finance at an early stage of development.
The Seed Enterprise Investment Scheme (SEIS), broadly speaking, allows early stage companies with a 'qualifying trade', fewer than 25 employees, and gross assets of less than £200,000 – to raise up to £150,000 of capital. SEIS investors get upfront income tax relief of 50% of the amounts subscribed for eligible shares, with no capital gains tax (CGT) liability on the disposal of qualifying shares held for more than three years.
There is also an exemption from CGT on gains realised from the disposal of other assets in 2012/13, where the gains are reinvested in SEIS companies in 2012/13 or 2013/14 and held for a full three years, as well as for gains realised in 2013/14 and subsequently (exemption capped at 50% of the SEIS investment).
The Enterprise Investment Scheme (EIS) is similar to SEIS and allows companies with a 'qualifying trade', gross assets of less than £15m before investment and fewer than 250 employees, to raise up to £5m (in any twelve month period) through newly issued ordinary shares.
EIS investors potentially receive upfront income tax relief of 30% and CGT exemption on the disposal of qualifying shares held for more than three years. EIS investors also have CGT-deferral opportunities. They can defer a gain on any other asset realised in the period beginning three years before and one year after the EIS investment.
To qualify for SEIS and EIS income tax relief investors cannot own more than 30% equity in the relevant company.
SEIS and EIS offer generous tax reliefs and individuals with an appetite for risk can benefit from these schemes, while also boosting an essential area of economic growth.
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