Tax

Our tax specialist can help you avoid tax problems later by advising you on the key tax considerations when starting a business.

Overview

New businesses need to think about tax from the outset to avoid tax problems later. It is important to choose the right entity for your start-up whether it is sole proprietor, partnership, or some form of corporate body. We can advise on the advantages and disadvantages of each before making this choice and whether reliefs such as SEIS and EIS may be available.

It is important to incentivise and retain key employees and there are a number of tax efficient ways to achieve this. We can discuss with you the tax advantages of different share option schemes and which may be the most appropriate for your business.

FAQs

Sole Trader

Tax on profits:

  • You pay Class 2 & 4 National Insurance and Income Tax on the taxable profits of your business, or your share of profits, if you are in partnership.

Extracting profits

  • You may withdraw cash from the business without tax effect.

Selling the business

When the business or assets used in it are sold, you are personally taxed on any gain under the Capital Gains Tax (CGT) rules.

  • A disposal of an interest in a business or a disposal of business assets may qualify for CGT Entrepreneurs’ Relief.

Limited company

Tax on profits:

  • The company pays corporation tax on its taxable profits. Company tax rates are lower than higher rates of Income Tax.
  • Employees and office holders are subject to PAYE and NICS on their earnings from employment and many benefits attract income tax too.
  • Shareholders are subject to income tax on dividends.

Extracting profits

You are taxed on:

  • Any income withdrawn from the company. If it is a distribution it is taxed as a dividend. If it is earnings it is under PAYE and subject to NICs.
  • Most employment benefits received by you or your family and household are taxable (subject to tax-free exceptions).
  • Shares or securities in the company which are given to you at less than market value.

Selling the business

When the business or the assets used in it are sold, there is a double tax charge on shareholders. The company pays corporation tax on any profit that it makes on disposal. The shareholders are taxed on the distribution of the proceeds.

  • It may often be more efficient to sell the shares in a company, rather than its trade or business, or individual assets.
  • Company shares can be gifted.
  • Providing you own more than 5% of a trading company, a disposal with gains of up to £10 million may qualify for CGT Entrepreneurs’ Relief.

Under the Seed Enterprise Investment Scheme (SEIS) new companies can raise seed capital: it provides 50% tax relief for investors investing in start-up companies, with also a generous Capital Gains break.

  • The maximum amount an individual can invest into an SEIS company is £100,000 per tax year.
  • The maximum amount of investment that a qualifying company can receive is £150,000.

The Enterprise Investment Scheme (EIS) provides tax incentives in the form of a variety of tax reliefs to investors who invest in smaller, unquoted, trading companies.

  • The maximum amount an individual can invest into an EIS company is £1 million per tax year.
  • The maximum amount of investment that a qualifying company can receive is £5 million.

Scheme

Approved share optionscheme (usually an EMI scheme)

Employee Shareholder Status (or ESS) shares

What is it?

HMRC approved scheme giving employees ability to get shares in a tax efficient manner.

A HMRC approved arrangement under which shares can be given to an employee if they surrender certain employment rights

Tax treatment

No tax on granting the option.

No tax on exercising the option (as long as the employee pays an exercise price that represents the market value of the share at the time the option was originally granted).

CGT on sell the shares, hopefully at a reduced 10% rate

If value of shares issued is exactly £2k then no income tax charge for employee on issue of shares.

No CGT is payable by the employee when they sell the shares.

 

You can claim ER (which reduces the rate of capital gains tax you pay on the first £10 million of gains you make in your lifetime to 10%) for disposals of any of the following:

  • all or part of a trading business;
  • the assets of a trading business after it has stopped trading; and/or
  • shares in a trading company (or holding company of a trading group).

You can claim relief on proceeds from a partial or full sale of a business, shares in a company, or on the value of any business assets remaining after the company has ceased trading.

The relief is available for you as an individual if you:

  • are in business, for example as a sole trader or as a partner in a trading business; or
  • hold shares in your personal trading company (or holding company of a trading group).

In order to claim ER several conditions must be met:

1. You must have owned the business (or the shares) for 12 months before claiming the relief, or for 12 months before the date the business stopped trading.

2. It is essential that the business must be a trade and the activities must not include any non-trading activities that are substantial. The word “substantial” is not defined but HMRC accept that non-trading activities that make up no more than 20% of a business will not debar a claim for ER. When considering this test surplus cash can present problems. Cash that is not required as working capital or earmarked for capital expenditure or future business investment, may risk loss of ER as a substantial non-business asset. If you are building up cash reserves for a major purpose keep records of meetings and research done into possible acquisitions to prove that the money is retained for business purposes. This test must be passed throughout the 12 months before you want to claim ER.

3. If claiming ER on shares, a shareholder can qualify for ER as long as the company is their personal company. This means that for at least a year ending with the date of the disposal, the shareholder has been a director or employee, and has owned at least 5% of the ordinary share capital carrying at least 5% of the voting rights. Once the 5%test is passed other shares such as preference shares and certain types of loan note (non-qualifying corporate bonds) can also qualify for ER.

4. If claiming ER on shares it is important to remain an employee or an officer until the date the shares are sold. Therefore, if contemplating withdrawing from a business any resignation should not become effective before the contract for sale of the shares has become unconditional. Similarly, a non-employee shareholder (e.g. a spouse who owns shares but is not an employee) who meets the 5% test can qualify for ER by making them an employee or office holder (usually company secretary). There is no minimum working time condition, so long as the employment or office genuinely exists.