Is 2016 the perfect year to invest?
With tax incentives available for research & development (R&D), equipment purchases and the generous Seed Enterprise Investment Scheme (SEIS), the coming year is the ideal time to make tax-efficient investments in business.
Research &Development (R&D)
Tax relief for R&D is nothing new – it’s been around for more than ten years. What has changed are the rates being offered to companies by HMRC.
Before you dismiss R&D as something involving men in white lab coats, take note – the important word here for many businesses is ‘development’. HMRC defines this as where an organisation “seeks to obtain an advantage in knowledge or capability in a field of knowledge or technology through the resolution of a scientific or technological uncertainty”.
In plain English, this means that if you’re developing new projects, breaking new ground or creating your own way of doing something, chances are you’re undertaking R&D activities.
Projects must be related to the trade the company carries out, or a trade expected to start as a result of the work. However, be aware that this only applies to SME organisations as defined by HMRC.
The tax relief available for SMEs (organisations with a turnover of less than €50m and balance sheet less than €43m) is 230%. Practically, this means that for every £100 spent on R&D, the deduction against your profit is increased to £230. So instead of every £100 reducing your tax bill by £20, it’s reduced by £46 for a company taxed at the small companies’ rate.
Relevant R&D expenditure includes staff costs, software, consumable items, subcontractors, clinical trial volunteers, independent research and external workers, and there is much more scope to make R&D claims than most people think. If your business is active in manufacturing, software and/or product development, it’s a prime case for a possible claim.
If you would like more information, or you think you might qualify for enhanced corporation tax relief, please contact us.
Seed Enterprise Investment Scheme (SEIS)
The Seed EIS scheme is available to investors willing to put money into a new or start-up business (less than two years old). It’s aimed at people who are prepared to invest in small, high-risk new businesses. With higher risk comes potentially greater reward, so HMRC is therefore offering higher tax reliefs to those prepared to invest.
Investment is limited to £100,000, with 50% tax relief available in the year of investment. This means that, if the maximum amount of £100,000 was provided, the investor’s income tax liability would be reduced by £50,000 in that year (provided their tax liability was high enough).
The maximum shareholding available to investors is 30% and there are restrictions on the size of company at the time of investment - gross assets must be less than £200K and the number of employees must be fewer than 25. The money must be spent within three years.
What’s interesting is that while spouses, parents, grandparents and trustees of investors’ settlements cannot gain tax relief by investing in their spouse’s/children’s/grandchildren’s companies, other relatives such as brothers, sisters, aunts, uncles, nephews and nieces can. This therefore creates an interesting opportunity for family members who wish to help each other get started in business.
The relief doesn’t end there. If shares are held for more than three years, any income realised from their subsequent sale is free from capital gains tax.
This is a vast topic and, unsurprisingly, there are a number of hoops to jump through in order to gain the relief. If you’d like to know more then get in touch – we’d be delighted to explain it to you in more detail.