Making the most of tax advantages for startups

Making the most of tax advantages for startups

When starting a new business, tax may (understandably) be the last thing on your mind. After all, companies are often set up by entrepreneurs, not accountants. In addition, a new company brings a whole range of challenges every day that might feel much more pressing than tax. The truth is that tax can be a significant cost and should be given careful consideration.

Matthew Appleton reflects on some tax considerations for start-up companies below. It is worth noting that not all businesses trade as companies, yet this is the focus of the article.

Setting the scene 

The top-line UK corporation tax rate increased from 19% to 25% with effect from 1 April 2023, albeit the rate for small companies remains at 19%. There is a tapered relief for companies with profits between the lower and upper levels. Even with this increase, the UK remains competitive from a corporation tax rate perspective when compared to other jurisdictions.

It is often the case that new business opportunities may arise overseas and the top-line corporation tax rate is likely to be a consideration. However, a whole range of other tax factors should be taken into account, for example - where would profits be taxable? This may not merely be where incorporated but, potentially, whether centrally controlled and managed. In some cases, this may lead to profits being taxed in two jurisdictions, although there may be scope for double tax relief. In addition, the company would want to explore what reliefs are available to reduce tax. Additionally, there will be other, non-tax factors, such as legal obligations, connectivity to local client base, availability of talent and suitability of the local economic environment.

If you are looking to set up in multiple jurisdictions, you may want to consider how to structure this new venture. A holding entity, would involve a variety of considerations. Taking the UK as an example, receipts of dividends are often non-taxable (subject to conditions) and there is also the Substantial Shareholding Exemption that could take any future disposal of a trading subsidiary out of the charge to UK corporation tax (again, subject to conditions). UK companies do not pay withholding taxes on dividends, however, it should be noted that other jurisdictions will have their own pros and cons.

Exploring the tax incentives and reliefs available

New businesses are the growth engine of the economy, meaning that governments usually look to incentivise their growth to stimulate economic activity, encourage innovation, and support the creation of new jobs. As in all things, tax is a balancing act. Governments want to maximise growth and opportunity while still balancing the books on tax revenue.

There are a number of UK tax incentives that companies should be aware of. Examples are set out below – but note that this list is not exhaustive:

• Research and Development (R&D) Relief: This allows companies investing in qualifying R&D to reduce their tax bill or claim a cash credit where loss-making. Note, there are new (and tight) rules on notification of claims for new claimants.
• Capital Allowances: Relief can be claimed on capital spend such as machinery, vehicles and improvements to property. This can potentially include relief in full in the year of spend.
• Patent relief: UK patent box regime enables companies to claim an effective 10% corporate tax rate on certain qualifying IP profits.
• Creative Sector Reliefs: These are somewhat niche in nature and are in the process of being redesigned. They are targeted toward companies producing films, high-end television and video games.

In addition to claims that can be made by the company, thought should be given to potential relief at shareholder level:

• Business Asset Disposal Relief: Allows for a 10% capital gains tax rate on up to £1m (lifetime allowance) of capital gains on any future disposal, subject to qualifying criteria being met.
• Business Property Relief: Qualifying property reduces the value of said property to Nil for inheritance tax purposes.
• Enterprise Investment Scheme (EIS): This is designed to help smaller, higher-risk companies raise finance by offering tax relief to investors who purchase new shares in those companies. Investors can claim back up to 30% of the value of their investment in income tax relief and can sell their investment shares without incurring capital gains tax. There are limits as to how much can be invested.
• Seed Enterprise Investment Scheme (SEIS): Similar to the EIS, the SEIS is aimed at even smaller companies, offering higher tax reliefs to investors to reflect the higher risks of investing.

Take-home points

Making the most of available tax incentives whilst avoiding anything that may trigger unwanted consequences, requires careful planning, which is why working with an experienced advisor can make a major difference.

Some further take-home points are set out below:

• Keep records for your business.
• Ensure you make the necessary notifications and submissions – this may include Companies House, Corporation Tax chargeability, VAT registration and setting up a PAYE scheme for staff.
• Although it is sensible to budget for any tax credits, it is best practise not to rely on such credits.
• Take advice before any action, rather than after (as early as possible).
• Any overseas actions should be carefully considered, to ensure that no unanticipated consequences arise, which could prove costly from a tax perspective.

The future

Although this article is intended to give some food for thought, it is not meant to be either extensive or exhaustive. There are a multitude of considerations and these will depend on the specific circumstances of any given scenario. An old cliché (I don’t know any new ones) is that there is no one-size-fits all solution.

Tax is a constantly shifting landscape. For startups, it is important to understand how you will be impacted and what reliefs may be available.

Haines Watts advisors have extensive experience of assisting a wide range of businesses, including many startups and, of course, we would be delighted to help you both in terms of the start of your journey and beyond.

To find out more, get in touch with our team today.