An intern’s view: joining C+T’s entrepreneurial tax team

This post is part of our Entrepreneurial team’s regular series of blogs.

As my pandemic-affected third year of university entered the spring of 2021, I was delighted to receive an offer from Chiene and Tait (C+T) to take up an intern role in the Entrepreneurial Tax team over the summer. It had been an extremely strange year and it was refreshing to have such an exciting opportunity to look forward to.

While studying for my accountancy and finance degree at the University of Glasgow, I first came across the subject of tax in second year and was intrigued at the widespread implications this sector of accountancy has for virtually every company. However, I had no idea the depth and variety the tax sector had to offer.

My time at university studying taxation, and accountancy and finance in general, helped prepare me to some extent for my time at C+T. However, one of the most enjoyable aspects of my internship has been learning the various niche complexities and applications of entrepreneurial tax that I had no exposure to in my studies at university. From the very first team meeting on my first day, I was introduced to schemes such as the Enterprise Investment Scheme (EIS) and Enterprise Management Incentives (EMI).

It was exciting to get involved immediately in schemes and concepts I had little knowledge of beforehand and a good portion of the work I completed at C+T has revolved around these schemes, particularly EIS. I have become familiar with the entire EIS process and have enjoyed working through this process from advance assurance, a way of confirming with HMRC that a company and the proposed investment would likely meet the EIS conditions, all the way to sending out the EIS3s, the forms which allow investors to actually claim relief.

The nature of both of the aforementioned schemes are designed to give young, exciting companies aid in achieving their goals and working with these companies has definitely been another highlight of my internship. Many of our clients at C+T are growing companies that have ambitious visions and it is exciting to be able to support these companies as they make significant steps along their journey.

As an intern, I had a unique point of view of the team and, as someone who has never experienced full time work in an office, it was incredibly insightful learning how all the different teams function and the differing qualities required to flourish in each team. Despite working from home, I was blown away by the supportiveness and friendliness within our entrepreneurial team. Any time I needed help or support from anyone it was readily accessible and this has made what was initially a daunting experience – starting an internship from my make-shift bedroom/office – an extremely enjoyable experience and allowed me to absorb as much as I possibly could during the last few months.

I was able to get involved in a good portion of the work from my first day with the team and this allowed me to learn the best way – on the job. This was perhaps the most enjoyable aspect of my time at C+T as I was able to get stuck into the work and learn as much as possible in my time here. I learned a lot about the dynamics of working in a team and the importance of a positive culture and strong working relationships; all of this is present at C+T and is one of the main reasons why I enjoyed my time at the firm so much.

I am looking forward to spending more time consolidating my knowledge of the work I have already done and continue learning regarding other aspects of work here at C+T. My time here has given me a fantastic insight into working in a high-functioning team and whetted my appetite to learn more and work in this kind of environment in the future.

Interested in joining our team? See our vacancies here.

Home Working Expenses for the Self-Employed

Working for yourself can be a great option for the modern professional and comes with a variety of perks, such as a flexible approach to work and a sky’s the limit attitude to earning money however you see fit. But, despite the benefits, it’s not just positives when it comes to the elephant in the room. We are of course talking about tax.

Whilst there are some great tax incentives to make you consider striking out alone in the big wide world, some additional incentives are sometimes unclear or may seem confusing. That’s where we come in.

One such relief comes in the form of the “use of home”.

Self-employed individuals working from home can claim a deduction for “use of home”. The following two methods are used to calculate the level of relief available:

  • Flat Rate Deduction
  • Proportion of Actual Costs

We’re going to break these down for you so you can see whether you might be able to get a little something back, and how much you could be entitled to.

What is the flat rate deduction?

The flat rate deduction is based on the number of hours an individual spends ‘wholly and exclusively’ working on core business activities from home. The level of relief available is as follows:

  • 25 hours or more @ £10 per month
  • 51 hours or more @ £18 per month
  • 101 hours or more @ £26 per month

In addition to the flat rate deduction, it is also possible to claim a deduction for certain fixed and variable costs.

What proportion of actual costs can I claim?

Rather than claiming a flat rate deduction, self-employed individuals can claim a proportion of actual fixed and running costs of their home.

Fixed Costs:
Fixed costs include council tax, home insurance and mortgage interest. To calculate the amount allowable, it is necessary to calculate a reasonable adjustment to the costs based on the time spent working from home and the area in the house this relates to.

Variable Costs:
A proportion of telephone, broadband, heat and light costs are also an allowable deduction for tax purposes. An adjustment will need to be made to these costs for any private use.

Can I claim relief for anything else?

It is possible to claim relief in respect of the purchase of some furniture and equipment. The costs will need to be reviewed to determine whether capital allowances should be claimed. If any items are also used for non-business purposes, an adjustment will be required to account for any private use.

What other factors should I consider?

Capital Gains Tax Implications:

When an individual disposes of their main home Principal Private Residence (PPR) relief is available to claim against the gain. If their home is used exclusively for business purposes i.e. the office does not have any private use, PPR relief will be restricted and part of the gain will be chargeable to capital gains tax.

We understand that tax can be confusing, but whether you’re just starting out in your trade or a budding entrepreneur, it’s easy to recognise that every little helps when it comes to these incentives.

If you would like to discuss the relief options available to you, or need help with any aspect of self-employment tax implications, please don’t hesitate to talk to our team for advice, they can be contacted at mail@chiene.co.uk

A Graduate Journey: From Lockdown Graduation to Entrepreneurial Tax

This post is part of our Entrepreneurial team’s regular series of blogs.

Looking back to the 26th of March last year, I was a quarter of the way through my third year at university when the country was plunged into its first lockdown. The beginning of the pandemic changed many things in my life, as it did for everyone else. Daytime outings turned into zoom quizzes (which I’m sure everyone is fed up with now), and university completely changed in a matter of days. Long gone were the days of going to a lecture in a theatre; instead you could tune in from the comfort of your own home. Then came the news that exams would take place online (to every student’s delight). Completing exams in my bedroom was a surreal experience considering that, for the previous five years, I’d been doing them in large halls with invigilators watching my every move. Instead, the only concern I had – other than the paper itself – was making sure that I didn’t get unwanted visitors whilst trying to complete it.

Heading into my fourth year, I began to think about what my career after university would look like. The pandemic created uncertainty for every student in their final year. Graduating in what would become one of the worst economic periods in history presented me with anxiety, as I started to wonder whether the four years of university I was about to complete had even been worth it. After hearing the news that graduate jobs would be in short supply for the remainder of 2020, I began to assume the worst…

Flash forward to early 2021, and I began actively looking for what would be my graduate job. At the time, I was unsure about my career path, but I had a couple areas of interest from my studies and identified tax as being the predominant one. After scouring site after site and speaking to careers advisers, I finally came across an advert for C+T’s Entrepreneurial Tax Team. As I had only seen personal and corporate tax roles, this immediately stood out to me as it was such a unique role! After researching the sort of work the team did, I knew that it was exactly what I was interested in and would love to learn more about. After an extremely well-handled interview process, I was offered the role and couldn’t have been more delighted to start. From then on, I was counting down the days until I started.

Heading towards the end of May my start date began approaching. I’d just finished my final university exams a couple of weeks prior and was glad to get started right away. To begin with, I wasn’t sure how working from home was going to go, especially as I would be starting fresh in a brand-new environment. The typical questions rushed through my head: would I be able to get to know everyone, and would training from home be difficult?

At my first meeting a range of terms went flying over my head and I was worried I’d never understand what they meant or get to grips with what was going on. I expected a very steep learning curve and whilst I have felt the work is challenging, I am finally starting to get to grips with much of the work that we carry out here: from EMI valuations to preparing EIS applications. Without thinking, I’m now using the same acronyms that seemed so foreign to me only a couple of months ago.

The process of integrating into the team has been seamless, mainly thanks to just one thing: just how welcoming and supportive the Entrepreneurial Tax department is here at C+T. I would never have imagined how easy it would be to get to know a group of people through a screen, and it shows that there was absolutely no reason at all to be concerned about starting in a remote environment, especially here at C+T.

Interested in joining our team? See our vacancies here.

There’s Something Phishy Going on Here…

We’ve seen it before. The classic email with words so exciting they wrote them into Monopoly: ‘Tax Refund’. Everyone dreams of getting a little something back from the tax man. But not all of us are so lucky.

Many of these communications from Her Majesty’s Revenue and Customs (HMRC), will be genuine – for example, you may have received a letter with details of your latest tax code, or for some of you in the Self-Assessment regime, a letter which contains a statement and instructions on how to pay your latest tax liability.

However, you may also receive communication from HMRC in other formats – perhaps an email or text which promises large sums of money via a tax repayment. Or maybe even a threatening phone call in which the caller demands immediate payment of sums under the threat of legal action.

But please don’t be fooled.

Any form of communication that uses threatening or coercive language, or that asks for sensitive or personal information, is likely a baited attempt to ‘Phish’ these details from you.

What is Phishing?

Phishing is an attempt by cyber criminals to acquire sensitive information by pretending to be a genuine organisation, such as HMRC, through communications like emails and texts.

Mobile numbers and weblinks in these messages often lead victims to resources that mimic the organisation. These sites or ‘representatives’ then ask for personal details that are collected by the criminals, not the organisation.

What Does Phishing Have to do With Tax?

Cyber criminals posing as HMRC officers prey on people’s emotions – particularly the excitement over potential tax repayments (because let’s be honest – who wouldn’t want that?), and fear of prosecution if confronted with a fake tax liability. These emotions often make us jump without thinking, falling straight onto the hook of the scam.

For a lot of people, tax can be a complicated subject under normal circumstances, but pandemic vulnerabilities have also made scams in relation to SEISS grants and VAT deferral schemes common.

Since the first lockdown in March 2020, cyber criminals impersonating HMRC has increased considerably, according to HMRC’s own data (see chart).

HMRC Phishing Chart

It is important to note that whatever your situation, HMRC will never inform you of a tax repayment, penalty or liability via text or email, and will never use these forms of communication to ask for your private information or payment details.

What Does HMRC Say?

HMRC have useful information on their website that shows how to spot and report scams to their investigators.

To stay safe, HMRC suggest doing the following:

  • If you receive a text or email from HMRC and you are unsure whether it is genuine, you should never open any attachments or click on any links.  Instead, report the fraudulent email to HMRC and then delete the message.
  • If you receive a phone call, HMRC stresses that you should not provide the caller with any sensitive data if it is asked for. Instead, they request that you keep a note of the number and the time and date of the call and report to their investigators.
  • HMRC suggest that everyone remains alert for any indicators that would suggest the communication is fraudulent.  These may include:

 

  • Spelling errors and poor grammar.
  • The use of a generic address such as ‘Dear Customer’ or ‘Dear email address’.
  • The use of non-legitimate HMRC email addresses: such as an email being sent from a Hotmail or Gmail account.
  • Aggressive wording that pressures the receiver into believing urgent action is required.

Genuine communications from HMRC will always have the following information:

  • They will greet you using the name that you have already provided to HMRC e.g. the name you used when signing up for HMRC services.
  • Communications will include information and instructions on how to report phishing emails or texts.
  • They will never include a personal email address for you to reply to and the email will come from a genuine HMRC account (always double check the sender address in full rather than depend on the title name provided!).
  • The communications should never ask for specific figures or calculations or have any attachments unless you have agreed to this previously with HMRC and have formally accepted the risks.
  • HMRC will never provide you with a link to use to log onto your Government Gateway.  Instead, they will request that you log-in by using the normal processes.

It is important to take some time to read through any communications from HMRC and ensure that the email, text or phone call you have received is genuine before proceeding.

What Can Chiene + Tait Do?

If you have concerns regarding any communications that you have received from HMRC, please get in touch with us at mail@chiene.co.uk. We would be more than happy to review the communication to check if it’s genuine.

Remember: if in doubt, give us a shout!

R&D tax: key points in the recent consultation

This post is part of our Entrepreneurial team’s regular series of blogs.

Research & Development Tax reliefs (R&D) play a key role in promoting UK investment by reducing the costs of innovation, so it’s unsurprising that the Government wants the reliefs to remain up-to-date, competitive and well-targeted.

A consultation on the future of R&D Tax relief recently closed, exploring how this is supported and whether changes may be appropriate. Below are some of my thoughts on the key points brought up.

The case for consolidating the two schemes into one

In some instances, the R&D Tax legislation can be overly complex. Having two schemes means having two overlapping sets of rules instead of a single coherent system. Simplifying and consolidating the schemes makes sense, provided SMEs continue to receive preferential rates.

The RDEC model provides a step-by-step methodology for the calculation, and it would therefore make sense for the SME scheme to mirror this by standardising the process. Ultimately this should help HMRC review the claims effectively, improving turnaround times.

R&D compliance

There have been growing concerns over the past few years that the system does not provide adequate controls for the allocation of tax credits. HMRC aim to process claims within 28 days. However, due to their sheer number, there isn’t a lot of time for them to consider every case in detail. Whilst HMRC have the power to enquire into claims after they have been “accepted”, we should look to develop the incentive so that it provides as much certainty as possible in the first instance. After all, getting it right first time should be good for everyone and improve consistency throughout the process.

The new CT600L form helps this to a certain degree, but new regulations are required. Currently, there is limited regulation covering who can provide advice and the supporting documentation required. R&D Tax can have a significant impact on a company’s tax position and strategy, so it’s important that companies get the right professional advice on the matter.

Comparatively, other business advisory professionals (such as accountants and lawyers) must rightly conform to regulation and governance from their respective industry bodies. There is no such body to regulate R&D specialists. New regulation in this area would help to improve consistency and ensure companies are not put at risk of making an illegitimate claim.

Qualifying expenditure and new R&D definition

The world is ever-changing and, as such, incentives should adapt accordingly. Modernising the ‘software costs’ category to accurately reflect how data and hosting costs contribute to R&D processes is welcomed, and I hopefully look forward to this being reflected in both updated legislation and guidance once the consultation is complete.

It is also good to see the Government considering whether the R&D definition needs updating. This is especially necessary in terms of clarity, or to widen the kinds of research covered by reliefs. The UK definition of R&D was set out last in 2004, therefore it is definitely due a revisit. There’s a particular opportunity to identify better ways to address R&D practices and fields, which have changed significantly since then.

Overall, change is definitely coming. However, I view it as a positive modernisation. Genuinely innovative companies shouldn’t be worried about change, as the ultimate goal is to update and target the reliefs, whilst helping attract and retain key businesses in the UK.

If you have any questions about R&D tax relief, get in touch with our team.

Restricted activities: EMI can see clearly now with advance assurance

This post is part of our Entrepreneurial team’s regular series of blogs.

Despite the name, legislation regarding the Enterprise Management Incentive (“EMI”) scheme, is relatively lightweight; if you are a genuine SME there are few real pinch points for qualification. However, the main stumbling block for companies is often the qualifying trading activity requirement.

HMRC have set out a list of activities that are deemed to be excluded and undertaking any of these activities could lead to the company being disqualified for the purpose of EMI. A number of these activities are relatively straightforward and self-explanatory; take property development, farming, market gardening, and the provision of legal or accountancy services for example. Unfortunately, participation in any of these activities makes your company closer to winning an Emmy than an EMI.

For a full list of excluded activities, see HMRC’s guidance.

However, there are a few of these activities that exist in a somewhat grey area that companies need to be aware of before undertaking.

Receiving royalties and license fees

For many software companies, the receipt of royalties or license fees is the key revenue stream in their business model. Importantly, this does not encompass subscription fees being generated using a Software as a Service (“SaaS”) model.

So, if my business is generating income through the receipt of royalties and license fees, I’m disqualified, right? Not necessarily.

HMRC understand that this exclusion will negatively impact the genuine start-up companies that the scheme is designed to help. As such, they have implemented an important ‘carve out’ from this exclusion.

Where the receipt of royalties and license fees are generated from the exploitation of an intangible asset, for which the greater part has been created by the company continuing its trade, the company will not be disqualified from EMI. This bit of HMRC magic allows start-up companies to develop their product from scratch and to receive royalties and license fees from it, all while still qualifying for EMI. After all, don’t all unicorns need a running start?

Leasing

Another disqualified activity is leasing. Where a company generates its income from leasing its assets, regardless of whether they developed it from scratch or not, they will be disqualified from EMI.

However, what constitutes leasing is another grey area. The main indicator of leasing is that the customer is free to use the asset for the purpose for which it is intended. The example provided by HMRC revolves around what may be constituted as car hire: using the contrast between hiring a taxi, as opposed to say, a chauffeur. Here we must determine which can be described as a service and which can be considered a facility. In the eyes of HMRC, taxi hire can be viewed as the provision of a service and be qualifying for EMI, whereas chauffeured car hire is not.

When considering whether your company is generating income from leasing and, therefore, disqualified from EMI, it is vital to understand whether you are providing the asset to the customer for use by the customer, or if you are using your asset to provide a service to the customer.

Advance Assurance

Fortunately, HMRC operate a non-statutory clearance service that allows companies to write to them and ask for assurance that they will qualify if eligibility is a concern. This allows you to gain HMRC’s opinion before you jump the gun and issue EMI options to employees like wanted posters for Billy the Kid.

Additionally, if your company is being purchased, advisors will often look for evidence that HMRC has provided Advance Assurance marking your company as EMI qualifying. This is normally part of their due diligence procedures and makes it important in order to quell potential purchaser’s fears.

Should you have any queries on EMI, please contact the team and we will be happy to offer our expertise.

Three interesting EIS elements to learn about

This post is part of our Entrepreneurial team’s regular series of blogs.

After being in corporation tax compliance for almost 5 years, I felt it was about time I gave my wings a little stretch…so here I am, a Senior Tax Associate in the entrepreneurial tax team at Chiene + Tait (C+T).

With the backdrop of a global pandemic, it was strange starting a new job. I returned my laptop from my previous job and that evening I received my new laptop from C+T.

During my first team meeting at C+T, there were many acronyms flying around and grappling with these was initially rather tricky; the pace here is fast and efficiency is important, so the many acronyms are a necessity.

I anticipated my new role would involve a steep learning curve and, I can now say after four weeks, it most definitely has lived up to that. At this meeting I was already being assigned client work which was really exciting. I was expecting my first week to mainly involve lots of health and safety training and suchlike but even though there was a lot of training on those areas, it was balanced by the client work I was involved in and the training I received on EMI and EIS.

In my first two weeks, I was already involved in EMI valuations, preparation for an EIS report and research for various ad-hoc advisory pieces of work. I had also attended R&D technical meetings with clients and have now started drafting one of those R&D reports.

After these couple of weeks, the acronyms started to fall out of my mouth and the jargon started to get a little easier to understand. However, it is important to always be on guard as new terminology still crops up. My depleting stash of sticky notes are proof of this.

Anyway, enough about me. Now to delve into some of the interesting insights I have learned from my EIS work so far – here are three which show how complicated the subject can be, and the benefits of learning about it.

The Single Company Test versus the Substantial Test

If a single company wants to enter into a joint venture with another party, it should first consider either setting up or acquiring a subsidiary company (i.e. hold at least 51% of the shares in another company) before it does so.

The reason this is important for EIS is because it determines whether the company will be required to meet either the single company test or the substantial test. The substantial test applies when the company is part of a group and it is less difficult to meet than the single company test.

One of the requirements of EIS is that a company/group must either carry out a trading activity or exist wholly for the purposes to carry out a trading activity. Under the single company test, the legislation only permits an insignificant amount of the company’s activities to involve non-qualifying activities. The substantial test is that the group’s activities should consist of no more than 20% of non-qualifying activities. Therefore, by comparison, the substantial test has more flexibility.

The holding of investments is an example of a non-qualifying activity, and an example of an investment would be holding less than 51% shares in a company (for example, a joint venture). It is more difficult to prove, under the single company test, that holding such an investment is insignificant to the company’s overall activities than it is to prove that it is less than 20% of the group’s overall activities. As such, a company should therefore consider being part of a group (for example, by setting up its own dormant subsidiary) before it decides to enter into a joint venture, as it will be easier for it to preserve its EIS qualifying status.

If the single company test or substantial test is breached, the company would lose its EIS qualifying status.

The Control Condition

Continuing on from the above scenario involving an EIS company with a joint venture, it is also important that the ‘Control’ test is considered here. The ‘Control’ test requires that EIS companies can only have qualifying subsidiaries. This means that the EIS company can only control companies where it holds at least 51% of the shares.

Joint ventures tend to not be qualifying subsidiaries for the purposes of EIS, as the company will not usually hold more than 50% of the shares in that company. Therefore, it is important that the EIS company (in its own right or with a connected person) does not have control over the joint venture, and care should therefore be taken when drawing up joint venture/ shareholder agreements to ensure that this is so. If it does have control, the joint venture would be a subsidiary but not a qualifying subsidiary for the purposes of EIS.

If this requirement is breached, the company would lose its EIS qualifying status.

What to watch out for when spending money raised through EIS

A company is required to use the money raised from EIS wholly for the purposes of the qualifying business activity. The qualifying business activity must be carried out either by the company issuing the EIS shares or by a 90% qualifying subsidiary. The money raised should be employed within 2 years of the share issue (or, if it is later, 2 years from when the company begins its trade).

The legislation states that employing anything more than an insignificant amount of the money raised through EIS on a purpose which is not for a qualifying business activity will result in that round of investment being disqualified from EIS. For example, spending EIS money on a <90% qualifying subsidiary. A failure to meet the requirement does not itself result in the company losing its EIS status. The legislation allows for an insignificant amount of money raised to be employed for other purposes but does not specify what is meant by ‘not significant’.

If an investment round is disqualified from EIS, this can have a devastating effect for the investors in that round. The investors would lose their EIS relief for that disqualified investment round; and because of the ‘independent investor’ requirement under EIS, the investor would no longer be able to participate in future EIS rounds. This is because the investor would now hold shares which do not qualify for S(EIS) relief. It is therefore critical that a company takes care when spending money raised from EIS.

 

I hope you enjoyed reading about a few of the interesting insights I have picked up in EIS so far, and that it’s a useful guide to the kind of things you learn when you delve deeper into the subject.

If you have any queries on EIS, contact our team and we’ll be happy to help.

Joining the team: beginning my career in C+T’s Entrepreneurial Tax Team

This post is part of our Entrepreneurial team’s regular series of blogs.

Ever since I discovered Tax as a subject during my undergraduate degree, it has been my goal to pursue it as a career. In my 4 years at university, Taxation was my favourite course and it was the first time during my degree that I felt confident in what I wanted to do after graduating. Although it has felt like quite a journey to reach that goal, it has been well worth it.

Starting my role as a graduate trainee with Chiene + Tait almost a year on from finishing my university exams has been a big change, especially as I spent the last year working as a self-employed artist. When the first lockdown was announced back in March 2020, I felt as though there was suddenly an extra hurdle in front of me, blocking my path to beginning my career. However, looking back now, I feel as though it was an important part of the journey. I had the chance to try a completely different career path from the one I had planned, and it was nice to be able to stretch my creative muscles. I spent a lot of the year painting animal portraits and creating illustrations, and I had the opportunity to try running my own little business. The experience taught me a lot, but it also gave me the time to reflect and really think about what I wanted to do with my future, and it ultimately confirmed to me that what I really wanted was to pursue a career in tax.

I have now been in my role as Entrepreneurial Tax Trainee with Chiene + Tait for just over 2 months, and, despite joining from my make-shift home office in my dining room, I feel as though I have already begun to settle in as part of the team. After a couple of months as trainee, I am confident I am exactly where I need to be. I am really enjoying learning about the entrepreneurial side of tax, as it was an area I never got to explore while I was at university. I have been lucky enough to have had the opportunity to be involved in calls and interactions with clients, which has been great. Having spent a lot of time working in customer service, it is something I have developed a passion for, and I like that our firm combines a focus on customer service with technical advisory in a professional environment. The diversity in the clients we work with in the entrepreneurial team and getting to see the fascinating work they are doing makes the job even more enjoyable.

It is a little strange to start a new job working from my own home, and while it has its perks – particularly the 10 second commute to my desk – I am really excited for the days when we can get back in the office and have the chance to meet and get to know the team and others within the firm better.

Overall, I have been completely blown away by how friendly and supportive everyone has been since I joined, as well as by how much I have already had the chance to learn from the team. It makes all the work – the 4 years of university, the months spent gaining work experience, and the many hours spent completing job applications – feel worthwhile.

Interested in joining the C+T team? Find more information and our vacancies here.

EIS excluded activities – royalties and licence fees

This post is part of our Entrepreneurial team’s regular series of blogs.

When considering whether EIS funding might be an option for your company, one of the first questions to ask is whether your company is carrying on any ‘excluded activities’.

In most cases this means a quick Google search and ticking off the checklist. There are a considerable number of activities which are excluded, such as property development, shipbuilding and energy generating activities (a full list can be found here).

One important point to remember is that, despite the name, excluded activities don’t necessarily exclude you from EIS. Instead, you have to consider whether excluded activities amount to ‘a substantial part’ of your trade. As the meaning of ‘substantial’ is not provided anywhere in the EIS legislation, HMRC considers such cases individually.

The rule of thumb to keep in mind is that as long as the excluded activity accounts for less than 20% of the whole trade, then usually such activities will not be ‘substantial’. When HMRC is considering the activities of a company as a whole, they may look at such aspects as turnover, assets used in the business, or the time spent by management/employees on different activities, although again this will very much depend on the particular situation of a company.

Many companies seeking EIS funding will likely not be carrying on or planning to carry on any excluded activities, with the notable exception of receipt of royalty and licence fees. If a company is creating IP or developing a service which it plans to licence to its customers, the receipt of licence fees or royalties may naturally be a large part of their (future) business.

There is an important waiver to this general exclusion, which applies where a company has created the whole or the greater part of the value of the “Relevant Intangible Asset” (“RIA”) from which licence or royalty fees are derived. This allows companies to acquire IP at an early stage, for example, and develop it significantly to where they have created the greater part of it in terms of cost (even if it’s only £1 more!), and the receipt of any licence or royalty fees stemming from this would not be considered as an excluded activity. The exclusion would automatically apply where a company has developed all of the IP themselves.

It’s important to note that such an RIA does not have to exist on the company’s balance sheet; there need only be the possibility that you could put the asset on your balance sheet in line with IFRS. As a result, companies would not need to worry about capitalising this intangible asset (unless they wish to) and could instead provide HMRC with details of their development costs incurred or any patents that have been applied for or granted.

HMRC looks closely at the (potential) receipt of royalties and licence fees, as it is a part of the trade of many EIS companies and a frequent area of concern. As a result, it’s always best to provide HMRC with as much information as possible on the nature of any royalties and licence fees, such as clearly explaining in a business plan that licence fees are generated from IP that the company has developed on its own or created the majority of.

If you are considering EIS funding for your company, you should try to be mindful of whether there are any pitfalls you could fall into, although some can be much harder to spot than others!

If you have any queries on EIS please contact our team.

The importance of Unrestricted and Actual Market Value for S.431 elections

This post is part of our Entrepreneurial team’s regular series of blogs.

In the world of entrepreneurial tax, abbreviations are much-loved and you may have noticed two that often pop-up: AMV and UMV. These stand for actual market value (AMV) and unrestricted market value (UMV), and understanding these two terms is extremely important if you are considering issuing shares in your Company to your employees.

First, Unrestricted Market Value. HMRC defines this as the market value of securities immediately after a chargeable event assuming that they had no restrictions. Actual Market Value, however, is the value of the shares with restrictions. But what exactly are restrictions and how do you know whether your shares have any?

The legislation splits restrictions into three main categories:

  • risk of forfeiture (where the disposal will be less than for the full market value)
  • restriction on freedom to retain or dispose of securities (for example if Directors are not allowed to sell their shares if they leave the Company)
  • potential disadvantage in respect of the securities (such as if the shareholder does not receive dividends from the shareholding)

Restrictions are set out in the Company’s Articles of Association but can also be found in separate agreements such as subscription agreements and employee share scheme rules. Shares in most private companies are not completely freely transferable, i.e., they are not freely able to be sold. These restrictions decrease their marketability and, therefore, their market value. For this reason, we deduct a percentage (usually 10% according to HMRC accepted practice but this can vary depending on the extent of these restrictions) from the UMV to account for these restrictions and reach the AMV.

AMV and UMV are particularly relevant when issuing shares in your Company to employees if you are also considering whether to enter an S.431 election. Entering this election means that the restrictions are ignored on the shares and so the shares are treated as having been acquired at the UMV. The election must be entered into within 14 days of the employee acquiring the shares.

But why would your employees want to elect for the UMV and possibly pay a higher price or have a greater tax charge when acquiring their shares? Well, by signing a s.431 election and electing to be deemed to have acquired the shares at this higher amount, when it comes to selling the shares any growth in the value will be taxed as a capital gain at the lower rates of 10% or 20% and no amount will be subject to income tax on sale. Any unused annual exempt amount can also be offset against this gain, further reducing the tax due.

Therefore, signing a S.431 election is usually what we would recommend if the shares are expected to grow in value but, of course, this does carry a risk because the shares could fall in value. If you choose not to enter into a s.431 election, you will acquire your shares at the AMV or below, i.e. you will acquire them at a discount. This discount on the UMV will then be subject to income tax at the basic, higher or additional rates (at 20%, 40% and 45% in England and 19%, 20%, 21%, 41% and 46% in Scotland), and the percentage ‘discount’ between AMV and UMV will be taxed as capital on sale. This means a potentially significant income tax charge on that percentage rather than capital gains tax on the whole gain.

Finally, the above transactions will also need to be included upon your Company’s annual ERS return (due 6th July: an important date to note in your calendar.) These forms report events such as employees being granted shares or options, options being exercised, or options lapsing, and you may need to note if an s.431 election has been entered into. When filling out these forms, the AMV and UMV are often also required at grant and/or at exercise. It may be that another valuation is needed to work out the values.

Unrestricted and Actual Market Value are two numbers that you will need to keep in mind when issuing shares in your company. Make sure you are calculating and using them correctly by checking with a member of our team – contact us with any questions.

R&D tax and the impact of loans: what to look out for

In the past year we’ve seen a marked increase in the availability of loans for start-ups that focus on technical innovation. These provide favourable rates and have high acceptance levels, particularly for companies that are pre-revenue. There are also a number of “COVID loans” available, such as the Bounce Back Loan (BBL) and Coronavirus Business Interruption Loan Scheme (CBILS), which has provided some vital cash to keep the lights on during the pandemic.

In most instances, these favourably-termed loans are notified state aid, meaning that there are significant complexities with how they interact with R&D Tax relief. If the loan is deemed to be notified state aid, the same rules apply as if they had received a notified state aid grant. EU regulations require that a single project cannot receive more than one form of notified state aid meaning that, if it is determined that a project has been funded via a notified state aid loan, the project would be ineligible under the SME scheme.

Most of these loans are designed to support working capital commitments rather than specific R&D projects. However, we have seen companies inadvertently impact their R&D tax claim due to how they have allocated the loan. The devil is very much in the detail here and it is important to understand the terms of the loan agreement fully.

Firstly, you need to check to see whether the loan is indeed a notified state aid – something that the loan provider should be able to confirm. If it is, the activities and costs relating to the R&D project should be excluded from the loan application, protecting any tax benefit that would be available under the SME scheme. Instead, check the terms to see if the loan funds can be used for non-R&D expenditure such as marketing or rent, and keep records so that there’s an audit trail to show that there is no-cross over in funding.

Whilst these loans are on favourable terms, they still need to be repaid. It would foolish to restrict the ability to utilise all available relief due to lack of planning, particularly when most of these loans are designed to support the day-to-day running of a business rather than specific R&D projects. With a bit of tax planning it is possible to maximise the overall relief available and get the benefit of both.

If you need any support, or have any questions, contact us and we’ll help.

This post is part of our Entrepreneurial team’s regular series of blogs.

Grants: the benefits to your business

This post is part of our Entrepreneurial team’s regular series of blogs.

Grants are available on a wide range of business activities, providing funding that can enhance research and development, regional assistance, environmental aid and much more. Grants provide financial support to an entity to cover a percentage of eligible expenditure incurred on a project.

The percentage and nature of the eligible expenditure will be determined on a grant-by-grant basis and will be set out in an offer letter. Two of the most common grant-giving bodies for Scottish businesses are UK Research and Innovation (UKRI – commonly seen as Innovate UK) and Scottish Enterprise.

The incentive

Grants are a great way to reduce the net outgoings on research and development projects of a business. Grants aren’t limited to businesses with a primary function of research and innovation or businesses at early / pre-revenue stages, so they can be used by more mature businesses undertaking projects which meet relevant criteria from grant-giving bodies.

The considerations

Grant funding is generally set at a percentage of eligible expenditure up to a maximum amount, but may also include a minimum eligible cost expenditure. Consideration should be given to the cashflow impact on the business of seeking and accepting grant funding. Whilst a percentage of costs will be covered under the grant funding it is rarely 100% of the expenditure. Receipt of grant funding is likely to occur following a quarterly submission and expenditure has to be defrayed in the period, creating a cashflow timing difference that will need to be managed.

If the business is claiming R&D Tax Credits these could be impacted depending on the nature of the grant. It is always worth speaking to your tax advisor at an early stage of the process as the financial impact to the business may be more complex than the expenditure on the project less the total grant receipts.

The reporting requirements

Typically claims are submitted on a quarterly basis to the grant-giving body. As mentioned above, the terms of what qualifies as eligible expenditure is set out in an offer letter along with total expected eligible expenditure. The total value of the grant will determine how often an Independent Accountant’s Report needs to be submitted to the grant-giver. Frequency of reports can range from each quarterly grant claim to only being required for the final claim. It’s important to check what the requirements for Independent Accountants Reports are to avoid a delay in receiving funds.

The help

Our audit team have extensive experience providing Independent Accountant’s Reports on grant claims to meet your obligation under the grant terms.

Maybe your business has recently received grant funding for the first time and you would like support to create systems to monitor the spend on the project, which feeds into the submission to the grant-giving body. We’re adept at being able to provide solutions to reduce the administrative burden on businesses of record keeping in a tailored and logistical manner.

If you have any questions, please contact our Entrepreneurial team.

Identifying qualifying R&D in the field of software development

This post is part of our Entrepreneurial team’s regular series of blogs.

The number of Research and Development (R&D) Tax Relief claims made in the computer science and information technology industries has rapidly increased in recent years. With that, HMRC have invested time and resources into educating their inspectors to identify qualifying and non-qualifying activities within software development claims. This is because, although the Business Energy and Industrial Strategy (BEIS) guidelines (that define the qualifying criteria for R&D tax relief) apply equally to all fields of science and technology, HMRC recognised that there had been difficulties in the past in applying them to some software projects and therefore determining whether they were eligible for relief.

As well as training their staff internally, HMRC published guidance for claimant companies to assist them when preparing claims, to accurately capture only qualifying activities and costs. A summary of the key points are as follows:

Advancing knowledge or capability in the entire field

The advance or appreciable improvement being sought needs to advance the knowledge or capability across the whole field of computer sciences and information technology, rather than the company’s own knowledge or capability. Whether the advance applies to the entire industry or only the company can sometimes be hard to ascertain in a fast-moving industry such as computer sciences. This should be considered by a competent professional working in the field and by reference to publicly available information.

Focus on the underlying technology

The technological advance being sought should focus on the underlying technology being developed i.e. the algorithms and methodology, rather than the commercial output of the software. This is because software can be developed to provide functionality that is novel, however the methodology applied to achieve this is routine, and therefore non-qualifying.

How to identify technological uncertainties

As with all other industries, the claimant company must also face technological uncertainties when seeking to achieve the advance. Technological uncertainties arise when how to achieve the aim it is not readily deductible by a competent professional or by applying existing methodology. Examples of technological uncertainties that HMRC provide include:

  • Developing new or improved data architectures that cannot be achieved with readily deducible solutions, e.g. pushing beyond the boundaries of existing readily available database engines.
  • Extending software frameworks beyond their original design, where knowledge how to extend these was not available or readily deducible at the time.
  • System uncertainty when working with multiple components, resulting from the complexity of the entire system, rather than how the individual components behave, i.e. components cannot be assembled into an established pattern.

Separate the R&D project from the commercial project

R&D projects must be carefully defined within the larger commercial project. Any activities that do not attempt to overcome technological uncertainties do not qualify for relief and fall out-with the project for tax relief purposes. Specific activities that HMRC state do not qualify for R&D tax relief include:

  • Planning activities associated with non-R&D elements of the project such as financial, marketing and legal aspects.
  • Development of routine aspects of the software, such as the user interface, rather than the underlying technology.
  • Testing only qualifies if the purpose of the testing work is to feed back into the development, not to validate that it works properly once the technological uncertainties have been resolved.
  • Deployment or release activities that transfer software to production systems generally happen after the uncertainty is resolved and, as such, do not qualify.
  • Maintenance activities or minor fault fixing where no technological uncertainties arise do not qualify.

HMRC are increasing resources in their R&D team and diverting and re-training staff from other areas to enable them to process and accurately analyse the eligibility of claims. Therefore, it is important that companies consider and adhere to the above guidance when making software development claims.

Here at C+T we have extensive experience in preparing R&D claims in the computer sciences sector and our report to support a claim is designed to give HMRC all of the information it requires to assess its eligibility and prevent an enquiry being opened to request more details.

Our team of experts are on hand to help you through the claim process, give you peace of mind that all relevant factors have been considered, and significantly reduce the risk of an enquiry. If you have any questions, get in touch and we can advise.

If you would like further advice regarding the availability of Research & Development Tax Relief relief, please get in touch with us.

How older companies can qualify for EIS

This post is part of our Entrepreneurial team’s regular series of blogs.

This week I’m looking at the ways that companies can qualify for EIS despite being outside of the ‘initial investing period’. There are a few ways to do this, but there are also a number of areas to watch out for where mistakes that prevent EIS qualification can be made.

What is the initial investing period?

Broadly, the initial investing period is the seven years following a company’s first commercial sale. (Knowledge Intensive Companies (“KICs”) have more generous rules which allow them a longer initial investing period and several other relaxations: for more information see the blog my colleague Ryan wrote.)

The first commercial sale can sometimes be tricky to pin down. It’s defined in the European Commission’s Guidelines on State Aid as “the first sale by an undertaking on a product or service market, excluding limited sales to test the market”. The key point to bear in mind is the “limited sales to test the market” point, as the first time a company makes a sale (for example of a prototype) does not necessarily mean that the seven year clock to receive EIS will immediately start ticking after this.

Receiving EIS investment after the initial investing period

There are three conditions that allow companies to access EIS investments after the initial investing period – conditions A, B and C. Your company only has to meet one of these.

Condition A – past S/EIS received

Funding under condition A is available if a company has already received past S/EIS investment before the end of the initial investing period and:

  • the new EIS funding is used for the same qualifying business activities as the first S/EIS funding was; and
  • the company’s business plan at the time of the initial funding foresaw the need for follow-on funding.

It is the second condition that is a frequent issue. Where companies suspect that they will require further funding, this should always be specified in the business plan – even if the quantum of future funding required is not specifically known at that time.

(NB: where the initial S/EIS was received before 18 November 2015, the business plan does not have to show the need for follow-on funding.)

Condition B – new product or geographic market

Condition B allows companies to receive EIS funding where:

  • the amount of the EIS funding, together with any other EIS, SEIS, VCT, SITR or other Notified State Aid funding (e.g. Innovate UK or SMART Grant) within a 30-day period, is at least 50% of the company’s average annual turnover (calculated by averaging the company’s turnover for the past five years); and
  • the money raised by the EIS funding must be used for entering a new product market or geographic market).

The first test is often overlooked as companies focus on the second. It is important to note that non-EIS investment does not qualify. Scottish Investment Bank match equity funding, for example, is not a Notified State Aid and does not qualify.

As the EIS funding needs to be spent entirely on the new product or geographic activity (and companies need to show how the money will be spent), companies should not try to raise more money than they need for the new activity, as spending money on other business activities would cause them to fail the condition. On the other hand, the first part of the test may mean that companies need to raise a large investment if they have succeeded in generating significant turnover over the past few years – so it is important that companies carefully consider exactly how much EIS funding they require.

To be considered to be entering a new product market, a company must show that it is targeting a new customer base, and not just releasing a new product which its existing customers would use.

In terms of entering a new geographic market, companies need to show that the conditions of competition are appreciably different in this new area. Expanding to a new city is not likely to meet this test, but expanding to a new continent likely is.

The key point for a company to prove with relation to condition B is that it would not be possible to use its previous track record to assess the potential of success for its new activity. Companies should aim to demonstrate to HMRC that they are effectively setting up a new business, not just slowly expanding.

Condition C – past EIS funding under condition B

Condition C is, luckily, a lot simpler, and is simply for companies that have raised EIS funding under condition B and now wish to raise follow-on funding. The rules are the same as for condition A – remember the importance of specifying the need for follow-on funding in the business plan!

In Summary

Securing EIS investment after the initial investing period of 7 years may look like a daunting process, so if you think that this might apply to your company it’s best to start thinking about it sooner rather than later. That way, parts of the tests are less likely to catch you out in the future.

If you would like further advice regarding the availability of EIS relief, please get in touch with us.

New anti-avoidance R&D tax relief measures come into force

This post is part of our Entrepreneurial team’s regular series of blogs.

A new PAYE/NIC cap on SME tax credits is coming into force for accounting periods beginning on or after 1st April 2021. The cap is designed to target fraud and abuse of SME tax relief schemes.

This measure has been a long time coming, having gone through a number of consultations. Whilst the cap is not designed to affect genuine and authentic SME tax relief claims, anyone making a claim should be aware of its impact – a business may inadvertently fall foul of the new rules, jeopardising its access to tax credits.

The measure limits the amount of payable Research & Development (R&D) tax credit which an SME can claim to £20,000 plus 300% of its total PAYE and NIC liability for the period. There is an exemption from the cap if:

  • its employees are creating, preparing to create or managing Intellectual Property (IP) and
  • it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPWs) by, connected persons

For these purposes, IP includes: any patent, trademark, registered design, copyright, design right, performer’s right or plant breeder’s right. As announced at the Budget 2021, the definition of IP has, happily, also been widened to include ‘know-how’ and ‘trade secrets’.

There is, however, still a risk that companies may inadvertently be affected by the cap – for example where the company has low payroll expenditure compared to other eligible costs and doesn’t meet the above exemption.

In most instances, particularly where the company is an early start-up, the tax credit can provide a vital lifeline. The PAYE/NIC cap adds another layer of complexity to the tax claim processes which – whilst not impacting the majority of claims – requires companies to plan now rather than wait to the end of their accounting period, to ensure that there is no unintentional impact to this critical source of funding.

If you have any questions, contact me at david.philp@chiene.co.uk or 131 558 5800.

Tax yourself: a Friday tax quiz ahead of the Tax Day

This post is part of our Entrepreneurial team’s regular series of blogs.

In anticipation of UK’s first “Tax Day” on 23 March, which will see Rishi Sunak outline upcoming consultations and medium-long term strategies, we thought that this week we’d offer a tax-themed pop quiz for a Friday afternoon…

    1. Who said: “The nation should have a tax system that looks like someone designed it on purpose.”?
    2. Who said: “The difference between tax avoidance and tax evasion is the thickness of a prison wall.”?
    3. Who said that taxation should follow the four design principles of ability to pay, certainty, convenience and efficiency?
    4. What is referred to as the £20bn “stealth tax” announced in the Budget?
    5. Which tax is most widely expected to be targeted on Tax Day for a rates rise or simplification that results in further tax being raised?
    6. Prior to income tax, which tax was designed to impose tax relative to the prosperity of the payer?
    7. The excess profits tax, introduced to fund the First World War and on profits above the normal pre-war level, was initially at what rate?
    8. In the first budget after Margaret Thatcher’s election victory in 1979, the top rate of income tax was reduced from 83% to what?
    9. What is the proposed rate of a currently proposed online sales tax?

Tricky? Well, here are the possible answers – see if you can match them up: (Note that there are more answers than questions, so some are red herrings.)

    1. Barack Obama, former US president
    2. Denis Healey, UK Chancellor of the Exchequer 1974 -1979
    3. William Simon, US Treasury Secretary 1974 – 1977
    4. 2%
    5. 60%
    6. Capital gains tax
    7. 50%
    8. A freeze on income tax, capital gains and IHT thresholds/allowances
    9. The poor tax
    10. 5%
    11. The window tax
    12. Inheritance tax
    13. Adam Smith, Scottish economist

Got them? Answers below…

The answers…

 

    1. Who said: “The nation should have a tax system that looks like someone designed it on purpose.”? C – William Simon, US Treasury Secretary 1974-1977 
    2. Who said: “The difference between tax avoidance and tax evasion is the thickness of a prison wall.”? B – Denis Healey, UK Chancellor of the Exchequer 1974 – 1979
    3. Who said that taxation should follow the four design principles of ability to pay, certainty, convenience and efficiency? M – Adam Smith, Scottish economist
    4. What is referred to as the £20bn “stealth tax” announced in the Budget? H – A freeze on income tax, capital gains and IHT thresholds/allowances
    5. Which tax is most widely expected to be targeted on Tax Day for a rates rise or simplification that results in further tax being raised? F – Capital gains tax
    6. Prior to income tax, which tax was designed to impose tax relative to the prosperity of the payer? K – The window tax
    7. The excess profits tax, introduced to fund the First World War and on profits above the normal pre-war level, was initially at what rate? G – 50%
    8. In the first budget after Margaret Thatcher’s election victory in 1979, the top rate of income tax was reduced from 83% to what? E – 60%
    9. What is the proposed rate of a currently proposed online sales tax? D – 2%

 

We hope you enjoyed the quiz. Check back with us for analysis and information about the Tax Day on 23 March.

EMI consultation: share your views on possible expansion

This post is part of our Entrepreneurial team’s regular series of blogs.

One of the somewhat unexpected outcomes of the Budget on 3 March was the announcement of a consultation into the Enterprise Management Incentive (“EMI”) scheme. The EMI scheme, as noted in previous blogs, is a key tool for high-growth companies in recruiting and retaining employees.

Although there were many calls from industry bodies and professionals for a consultation on the scope of the Enterprise Investment Scheme (“EIS”), the Chancellor chose instead to focus on EMI, seeking evidence on whether the scheme should be expanded and how it could be expanded to best support high-growth companies.

The consultation is open and is seeking evidence on the following points:

  • Whether the scheme currently meets it policy objective of helping companies to recruit and retain employees.
  • Whether the scheme is meeting its objective of helping SMEs grow and develop.
  • Evidence on which aspect of the scheme is most valuable in helping SMEs with their recruitment and retention objectives.

The ways in which the scheme could be expanded could result in an extension of the qualifying trade criteria regarding the type of trade undertaken by a company, or perhaps the limits relating to the value of options a company can issue or an individual can hold, or less likely, an extension of the tax advantages, for example in relation to Business Asset Disposal Relief. Currently the limit of Business Asset Disposal Relief is £1 million, in line with the reduction from £10 million to £1 million for all eligible capital gains. It appears from the consultation document that one of the key areas for potential expansion would be regarding the limits imposed.

Further, the document asks whether the other tax-advantaged share schemes offer sufficient support to high-growth companies where they no longer qualify for EMI. We have recently commented on the use of CSOP as an effective tool, however, whether this is of much use once the EMI limits have been breached is questionable. The flexibility of EMI certainly makes it the most advantageous scheme and many companies will go on to use a form of growth share scheme once the EMI limits are reached, in order to ensure the highest growth opportunity for employees.

We will, of course, be responding to the consultation and encourage businesses who have used the scheme to either respond directly with evidence or get in touch with us if they wish to feed into our response.

If you have any questions on the consultation or how to provide evidence, please contact me as I will be collating our response.

Museums and Galleries Tax Relief: extending and widening this relief will boost the UK cultural ecosystem

Museum and Galleries Tax Relief came into effect from 1 April 2017, aiming to encourage the development of new exhibitions and incentivise their touring to a wide audience. Unusually, the legislation includes a ‘sunset clause’, which allows the relief to expire in April 2022 if it is not extended by the UK Parliament. We are around a year away from April 2022, so perhaps now is a good time to consider how well the relief is currently being used.

Whilst the relief was modelled on existing creative industry tax reliefs, there are some striking differences. As mentioned above, unless the relief is extended, it will expire next April. Claims are also subject to a cap of £100,000 (for touring exhibitions) and £80,000 (for non-touring exhibitions). This means the value of claims are substantially lower than in other creative industries’ tax reliefs, where no such cap exists.

Despite these caps, take-up of the relief has grown substantially over the years. Figures from HM Revenue & Customs (HMRC) show:

  • For 2018/19 £4 million was paid, covering 300 exhibitions included within 50 claims.
  • In 2019/20 £16 million was paid, covering 1,045 exhibitions included within 170 claims.

This is obviously an impressive increase in both the value and number of claims, especially for a 1-year period. So how does this compare to other creative industry tax reliefs? For 2019/20, the number of claims for Museum and Galleries Tax Relief is comparable to Theatre Tax Relief claims and is almost double the number of Orchestra Tax Relief Claims. The fact that there is a cap on the amount that can be claimed through Museum and Galleries Tax Relief has an impact on the total value of claims, but it does appear promising that the number of claims is comparable to the more established Theatre Tax Relief, which was introduced  3 years earlier.

All of this points to the fact that the relief is well used in the sector.  Many will undoubtedly have been disappointed to note no mention of an extension at the 2021 Budget. There is another chance for the Government to announce an extension; more tax policy details will be announced on 23 March and I hope that the UK Government will take the opportunity to not just approve the extension of the scheme but also to widen its scope. Currently many exhibitions which include live performances are not eligible for relief, nor are exhibitions that include objects which are for sale, and many organisations lose out on a cash injection as a result.

The Government could also consider widening access to the scheme. Currently, those organisations that provide public benefit, but are not charities, are not eligible.

Most museums and galleries are open to the public free of charge, so the money received from these tax relief claims boosts cash flow, giving a welcome boost of funding to these institutions so they can continue developing further exhibitions. An extension to the relief will be especially welcome in the coming years when, no doubt, we will continue to see the financial impact of the COVID pandemic on charity finances.

If you have any questions about Museums and Galleries Tax Relief, or any other creative industry tax relief, contact Catriona Finnie.

New consultation on R&D tax relief: this looks to be far-reaching

This post is part of our Entrepreneurial team’s regular series of blogs.

The R&D consultation announced at the budget is far-reaching and goes much further than last year’s, in which the Government consulted on bringing data and cloud computing costs into the scope of the reliefs as well as new SME anti-avoidance measures.

This time, the consultation will look to explore further with stakeholders the nature of private-sector R&D investment in the UK and nothing seems to be off the table: it will look at definitions, eligibility and scope of the reliefs to ensure they are up-to date and competitive, while providing targeted support to maximise the beneficial R&D activity for the UK economy.

There is an emphasis into how well the reliefs are operating for businesses and HMRC, and whether this could be improved points to a positive change in the legislation. “RDEC for all” has been suggested again, potentially with a higher rate for SME’S to simplify the process.

Over-claiming is again on the Government’s radar, however, as there have been growing concerns over the past few years that this system does not provide adequate controls over the allocation of increasingly large sums of tax reliefs being given for R&D. Noting that the current 28 day turnaround gives HMRC very little time to consider every case in detail, the Government is looking to explore how the integrity of the relief process can be enhanced. This, along with the increase in the number of HMRC Inspectors being hired – as well as the HMRC taskforce announced today – points to a clampdown on fraudulent claims.

The good news is that the Government has recognised the case for widening the scope of expenditure which attracts relief, such as plant and machinery costs, which has again been brought up as an area to improve. While covered by the Research & Development Allowance, the tax benefit can be negligible in some instances, particularly when the costs fall under the scope of other available Capital Allowances. Hopefully the consultation will result in the revisit of this relief.

Overall, the announced consultation is positive news and I look forward to feeding back into this. Genuinely innovative companies shouldn’t be worried about change as the ultimate goal is to update and target the reliefs, whilst helping attract and retain key businesses in the UK.

Employment benefits: reporting window is just around the corner

This post is part of our Entrepreneurial team’s regular series of blogs.

With the end of the tax year just over one month away, it’s time for employers to consider how they’ll be reporting employment benefits.

There are three options when it comes to reporting and paying the income tax and National Insurance (“NI”) due to HM Revenue & Customs (“HMRC”).

What are employment benefits?

Employers can provide their employees and office holders with a variety of benefits to incentivise new talent and give them that extra sweetener on top of basic salary. Common examples are medical insurance, gym memberships, company cars and interest-free loans. A checklist summarising common benefits provided to employees, which may need to be reported to HMRC, is available on our website – if you are unsure if you have taxable benefits to report, you can use the checklist which is available here.

P11D Forms

P11D forms are the most common way to report non-cash benefits provided to employees. Separate P11D forms for each employee receiving benefits and a P11D(B) form to declare the total Class 1A NI due by the employer must be submitted to HMRC. There is only a short window for the preparation and submission of these forms, as P11D forms for the tax year ended 5 April 2021 need to be submitted by 6 July.

The employees will be subject to income tax at their marginal tax rate on the “cash equivalent” value of the taxable benefit. The income tax due will either be collected via the employee’s PAYE tax code or their tax return if they submit one. The employer will be due to pay Class 1A NI at 13.8% by 19 July (or 22 July if paid electronically).

PAYE Settlement Agreement (PSA)

Alternatively, an employer can enter into a PAYE Settlement Agreement (PSA) with HMRC to report certain types of benefits. These allow the employer to settle the tax liability on ‘minor or irregular’ benefits on behalf of the employee. Under the PSA, the income tax liability is payable by the employer on behalf of the employee and it is calculated on a ‘grossed up’ basis. This can prove to be expensive as the total of the income tax and NI due (Class 1B NI at 13.8%) can be as much as the cost of the benefit itself (in the case of higher rate and additional rate tax payers). However, this is the best method for reporting minor benefits like staff entertaining, where an employer does not wish to burden their employees with any tax due.

HMRC must be notified before the 6 July after the tax year end for which you first wish the PSA to be in place. The PSA calculations detailing the income tax and NI due should be submitted by this date. The income tax and Class 1B NI liability is then payable by 19 October (or 22 October if paid electronically).

Payrolling benefits

It is possible to opt for ‘payrolling benefits in kind’, with the income tax due collected via the payroll in monthly instalments. A P11D(B) submission is still required with regard to the payment of the Class 1A NI but individual P11Ds are not required. As above, the P11D(B) will be due to be submitted to HMRC by 6 July with the Class 1A NI due for payment by 19 July (or 22 July if paid electronically).

The payrolling of benefits does require a registration to be in place before the start of the tax year you wish to start using the scheme. If you wish to payroll benefits for the tax year ending 5 April 2022 you should act to put this in place before 5 April 2021.

If you require any assistance with regard to the reporting of taxable employment benefits, bearing in mind the 6 July deadline, please contact us at Chiene + Tait as soon as possible.

EMI for start-ups: no time like the present to start-up your scheme

This post is part of our Entrepreneurial team’s regular series of blogs.

With each passing year it seems that start-ups become ever more prevalent.

Although the economy has been disrupted by the Covid-19 pandemic, the technology industry has experienced considerable growth. Entrepreneurs are seeing the opportunities that remote working brings and are looking to take advantage of gaps in the market. With the technology sector not looking like it is going to slow down anytime soon, how can your start-up find the difference that will ensure that it succeeds against all of the competition?

Although there is not one ultimate answer to success, having the right team is crucial. In fact, not having the right team has been found to be one of the top reasons for failure among many start-ups.

This is why the Enterprise Management Incentive (“EMI”) option scheme is such a valuable tool for young, growing businesses. With a work environment that often requires substantial commitment and hours, but with limited funds to reward employees for their efforts, granting tax advantageous EMI options can be a way for companies to attract and keep that team that will lead them to success.

So, when is the best time to start thinking about granting EMI options? Arguably the sooner the better. EMI options are granted following a valuation of the company’s shares which is agreed with HMRC. With unapproved (e.g. non-EMI) share options, the employee is subject to income tax and national insurance contributions on the difference between the value of the shares when the option is exercised and the option exercise price they pay, but with EMI options there is no income tax and national insurance charge due on this gain (as long as the exercise price is equal to or higher than the pre-agreed market value) – i.e. the gain made between the dates the options are granted and exercised is free of income tax and NICs (but it will be subject to the, lower, capital gains tax  charge – see below).

There will be capital gains tax on the eventual sale of the shares obtained through the options, but if 2 years have passed between the date of the grant of the options and the disposal then the EMI option holders may, if they qualify, be able to claim Business Asset Disposal Relief (previously Entrepreneurs’ Relief), providing an effective tax rate on the gain of only 10% on the first £1m of gain per individual.

So, with your employees having the prospect of reaping these rewards further down the line, EMI options are a valuable tool for incentivising staff and driving growth in your company.

If you are a very new start-up and, therefore, pre-revenue and yet to raise external investment (other than perhaps from friends and family) there really is no time like the present for incentivising and rewarding your current employees or encouraging others to join your team. In these circumstances, this can lead to a very low valuation of the shares for the purpose of granting EMI options; possibly the nominal value of the shares (usually 0.01p depending on what your share capital is divided into).

EMI option schemes are also worth considering at a later stage after initial investment has already been raised. In many cases, a company might issue options every year as a recruitment and retention tool. EMI schemes are a cost-effective and tax-friendly way for SMEs to incentivise employees, where the value of the company is expected to increase dramatically as the company grows.

If you are a start-up and have already started thinking about the best ways to incentivise and build your team or if you are further along in the process and want to grow your company even further, EMI options should always be considered. If you would like to pursue the possibility of this, please contact us in the Entrepreneurial Tax team here at C+T and we would be very happy to help.

EIS: alive and KICing for companies that innovate

This post is part of our Entrepreneurial team’s regular series of blogs.

There have been many tweaks made to the Enterprise Investment Scheme (“EIS”) since its inception in 1993. Mostly, these have toughened qualifying conditions. However, seeking to advance its use in certain companies, HMRC introduced significant relaxation of several EIS limits. This relaxation of the rules was only made available to Knowledge-Intensive Companies (“KICs”), which are the types of companies in which the majority of Scottish EIS investment funds are placed. This blog will explore the benefits and qualifying requirements of being a KIC.

The benefits of being a KIC

  • A company can raise £10m EIS investment per year and £20m EIS investment over the company’s lifetime (in comparison to £5m and £12m limits, respectively, for non-KICs).
    In addition, investors can claim tax relief on up to £2m worth of EIS investment, if at least £1m of this is invested in KICs.
  • A company can receive its first EIS investment up to 10 years from the end of the accounting period in which its turnover first exceeded £200,000 (the time limit being only 7 years from first commercial sale for non-KICs).
  • A company may have a maximum of 500 full-time employees (with the maximum for non-KICs being limited to 250).

How to qualify as a KIC

To qualify as a KIC, a company must meet two conditions: the operating costs condition and either the innovation condition or the skilled employee test:

Operating costs condition

  • The company must have spent:
    • at least 15% of its operating costs on research and development or innovation in one or more of the previous three years (or in the three years following investment for a new company); OR
    • at least 10% of its operating costs on research and development or innovation in each of the previous three years (or in the three years following investment for a new company).

Innovation condition

  • the company must be carrying out work to create intellectual property and expect the majority of its income to come from this within 10 years.

Skilled employee test

  • the company must have 20% or more of its employees carrying out research for at least 3 years from the date of investment, and these employees must be in a role that requires a relevant Master’s degree or higher.

In Summary

For most technology-based or R&D companies, the KIC conditions will be relatively easy to meet. However, HMRC will only provide pre-investment assurance of KIC status through its Advance Assurance regime if a company actually requires this status in order for the investment that it receives to be EIS qualifying i.e. to get within one of the higher limits that are permitted for KICs. If the limit in question is the investor one (i.e. if any investors are relying on the company being a KIC for their own personal EIS annual investment limit), the company must provide HMRC with the investor’s details and notify them of the investor’s requirement for their investment to be in a KIC.

These rules provide hope for companies that might, due to their age, have disregarded the possibility of receiving EIS investment. If you are interested in exploring the availability of EIS, please get in touch and we can discuss further.

Key points from a recent case about Research and Development tax relief

This post is part of our Entrepreneurial team’s regular series of blogs.

First Tier Tribunal cases and their decisions can provide useful clarification about R&D tax relief and how HMRC expects the guidance and legislation to be applied.

In this blog, I’ve summarised the facts of the Hadee Engineering Co Ltd v HMRC case from October 2020, looking at why the taxpayer lost and the key points to take away so you don’t fall foul of the same mistakes.

Costs

The court found that the taxpayer had, incorrectly, overstated salary costs and claimed for bonuses that were actually in the accounts for a previous period.

It was also found that there was a lack of evidence in relation to payments for materials and subcontractors. The taxpayer could not provide any evidence that these costs were incurred by the company or within the time period of the claim.

In addition, time and expenditure incurred on non-qualifying, routine activities were being claimed for, and the apportionments applied could not be justified.

Key points to take away:

  • It is important to remember that costs are only eligible for R&D tax relief if they are deductible for corporation tax purposes within the accounting period of the relevant R&D claim. Including costs from a different period or costs that are not deductible in calculating the profit of the trade is a breach of the rules (HMRC guidance CIRD81450).
  • While HMRC don’t require companies to keep detailed records, at a minimum a claimant company should be able to produce invoices and bank statements to confirm that these costs were incurred and within the relevant period. The “competent professionals” involved in the projects must understand what activities qualify for R&D tax relief, so they can arrive at ‘just and reasonable’ percentages to be applied to costs, that reflect the extent to which they were involved in the qualifying activities. If they are ever asked, they can then justify the approach taken to HMRC.

What is a competent professional?

Only one individual was provided by the company as a competent professional, but was unable to provide the relevant technical detail to allow HMRC to assess the qualifying nature of the projects. This meant that HMRC was unable to confirm that the projects included in the claim did actually qualify as R&D for tax purposes.

Key points to take away:

  • We often refer to competent professionals in the course of preparing an R&D claim, because HMRC sets this as the test for assessing whether an activity meets the criteria of qualifying R&D. Although the term ‘competent professional’ is not explicitly defined, they are qualified or time-experienced members of staff within the area of science or technology of which the advance is being sought.
  • These individuals need to be involved in the R&D claim process to some extent as they are required to provide the necessary supporting technical detail to enable HMRC to assess the eligibility of the projects. They are also required to provide the qualifying percentages that are applied to costs.

Supporting evidence

The case raised issues with the level of evidence provided by the appellant in support of their claim. HMRC argued that it was inconsistent, incomplete and did not address the key criteria which need to exist for activities to qualify for R&D tax relief.

Key point to take away:

  • While there is currently no standard format or template in which supporting evidence for a claim should be submitted to HMRC, it is pushing for more consistency. As such, HMRC has recently provided guidance for the type of information that should be included and clarified how many projects evidence needs to be submitted for.

Existence of a project

One of the requirements for qualifying R&D activities to be taking place is for the existence of a project. HMRC argued that there was no evidence that any projects existed within the claimant company. They stated that, for a project to exist, companies should have detailed evidence and records in-house that substantiate the plans and activities carried out.

Key points to take away:

  • Again, there is no specific definition of what constitutes a project in the R&D guidance or legislation. The judge in this case referenced the dictionary, stating that a project was a “plan or scheme; a planned undertaking” and agreed with HMRC that a formulation of a plan is required for a project to exist.
  • Companies claiming, or planning to claim, R&D tax relief should be aware that some form of record or documentary evidence is expected and, if that’s not possible, a competent professional is required to provide a detailed explanation. This again highlights the need for technically-detailed and structured supporting evidence to be submitted in support of a claim.

What constitutes subcontracted R&D?

A number of the taxpayer’s projects were undertaken in conjunction with customers. HMRC argued that the projects would be considered to be subcontracted because the company was commissioned to design bespoke products for customers. This meant that, if the projects did involve qualifying activities, they would be only eligible for relief under the RDEC scheme. (The RDEC scheme is open to large company and SMEs which do not qualify for the more lucrative SME R&D Tax Credit scheme. It is notably less lucrative, but still worth considering submitting a claim for.)

The judge referred to the contracts in place between the two parties and primarily focused on the economic risk, where in this case the claimant company was paid on an hourly basis for the work undertaken. As the taxpayer did not bear any economic risk, it was ruled that the projects were subcontracted. To further support the ruling, the customer on one project had successfully filed a patent for the design work carried out by the claimant company.

Key points to take away:

  • There is limited guidance available to assist in determining whether a project is subcontracted or in-house for R&D purposes. The three main points that should be considered are:
    • The ownership of the arising intellectual property;
    • Who bears the economic risk; and
    • The degree of autonomy enjoyed.
  • These points should always be considered when drawing up a contract with a customer when you will be undertaking qualifying R&D activities. If, for example, the contract supports that you retain any arising IP, you bear the cost of any project overrun and you have autonomy over how the work is conducted, then the project will still be eligible for relief under the more generous SME scheme.

Final thoughts

Ultimately, the court found that only one of the projects was eligible for R&D tax relief (though the amount of qualifying expenditure on that project is still in dispute).

In light of the coronavirus pandemic, HMRC is dedicating more staff to process R&D claims. While this means that we are generally seeing HMRC pay out claims quicker, it also means that HMRC has more resources to look into, and potentially enquire into, claims.

Here at C+T, our report format is designed to give HMRC all of the information it requires to assess the eligibility of a claim, to prevent an enquiry being opened to request more details. We also have experience in dealing with all of the complex factors that need to be considered when preparing an R&D tax relief claim, including contractual arrangements, which HMRC specifically scrutinised in this case.

Our team of experts are on hand to help you through the claim process, to give you peace of mind that all of the relevant factors have been considered and the risk of enquiry is significantly reduced. If you have any questions, get in touch and we can advise.

EIS: case update regarding dividend rights

This post is part of our Entrepreneurial team’s regular series of blogs.

To be (a preference) or not to be (a preference): that is the question. More accurately, that was the question before the Upper Tier Tribunal (UTT) last week regarding Foojit, a company whose EIS compliance statement was rejected by HMRC.

The court had to decide whether to uphold a decision made by the First Tier Tribunal (FTT) in 2019 that the right to receive 44% of dividends payable up to a limit, presumably aligned to investment delta, constituted “a preferential right to dividends” and therefore agree with HMRC. It did.

The case was intricate. Essentially, the UTT agreed with the premise of the FTT’s findings that there needed to be some deliberate action or decision on the part of the company to enable or initiate the dividend declaration. This, coupled with the clear position – accepted by both sides – that the quantum of the dividend was a preference, meant that the shares requirement for EIS compliance was not met. Interestingly, the UTT corrected the focus of all parties (including the FTT without so naming it) that it is not enough to consider the updated Articles. Rather, where there are model Articles in place, it is incumbent on the reader to consider both documents.

There is a disparity in the EIS legislation regarding preferences: the test looks at both assets and dividends and, whilst prescriptive regarding the latter, leaves the former undefined. This, coupled with HMRC’s long established, if counter-intuitive, position that rights to assets are only “preferential” if they enable one share class to receive before another share class irrespective of quantum, means that it is commonplace to award 99.99% of assets up to a hurdle to the EIS share class, so long as dividends are equal between all share classes. Note, all share classes. Users of deferred and growth share classes beware.

The UTT did provide some offer some hints at what it would have found acceptable, such as had the dividends been predetermined to be payable and then crystallise as a debt if unpaid, but I think that it would be a brave company that relies on that as offering a binding precedent.

In reality, the overwhelming majority of EIS companies will never get to be dividend paying whilst owned by the investors; successful companies will create IP and resultant large negative reserves before turning the corner and being acquired, or the less successful will fail. As such, my advice would be to lean toward pragmatism; leave dividends well alone. Don’t try to be too clever over rights that are not likely to be effective in practice. Focus on asset rights, which will make a difference to the investors rather than risk suffering the slings and arrows of outrageous fortune.

Employment Related Securities: a reminder in advance of the tax year end

This post is part of our Entrepreneurial team’s regular series of blogs.

This week I thought it would be a good idea to provide a very broad overview of the Employment Related Securities (ERS) regime, which rears its head following the end of the tax year (5 April 2021). This has (often confusing) annual reporting requirements to HMRC, which can frequently catch companies off guard.

What falls under the ERS regime?

ERS can be broadly defined as securities (usually shares) in a company which are acquired as a consequence of employment or directorship. Shares in a company where the person is an employee or director will very likely be deemed to be ERS even if, in fact, they are not acquired as a consequence of employment. The simplest rule of thumb is to let your accountant or tax advisor know if any employees or directors have acquired shares or options in your company during the year, as they will be able to advise you on what needs to be reported to HMRC.

As noted above, most times shares acquired by an employee or director will be deemed to be ERS. It’s worth bearing in mind there are only a few notable cases which the legislation will accept are not related to their employment – i.e. they are for another specific reason. The most common is the ‘family and friends’ exception, where the opportunity to acquire securities is made in the normal course of domestic, family or personal relations.

As an example, let’s take a director who is offering shares in the family company to his children. The children are also employees of the company, but are only being offered shares as he would like to pass on his shares to them for family reasons. On its own, this would qualify under the family and friends exception. But, if the same director offered all his employees (including his children) a bonus at the end of the year in the form of shares, then it would likely be the case that his children were receiving the shares by virtue of their employment, rather than because they are family.

What needs to be reported to HMRC?

Where ERS events have occurred during the year, companies need to report these to HMRC between 6 April and 6 July following the end of the tax year. Companies will need to set up a scheme on HMRC’s portal to do so, and it’s important to remember that, once a scheme is opened, a return will need to submitted each year for each open scheme even if nothing has happened.

The most common events reported are employees being granted shares or options, options being exercised, or options lapsing (usually when an employee leaves the company). Where companies grant EMI options, the grant is not reported as part of the annual return, but instead is notified separately within 92 days of grant. However, companies with EMI schemes would still need to prepare and submit an EMI annual return for any exercises or lapses during the year, and an ERS return for any unapproved options granted (or exercised or lapsed) e.g. options granted to directors who did not qualify for EMI.

It’s also worth emphasising that although not all ERS events will give rise to a tax charge, they will still need to be reported to HMRC to avoid penalties.

If you have any queries at all about ERS, please contact us at Chiene + Tait.

Company Share Option Plans: the alternative to EMI?

This post is part of our Entrepreneurial team’s regular series of blogs.

Over the past few months, as companies have been seeking alternative methods of employee incentivisation with less impact on short-term cashflow, we have seen a considerable increase in requests for share schemes and incentives.

The obvious port of call is the Enterprise Management Incentive scheme, being the most tax advantageous available. However, certain trading activities do not qualify for EMI, and employees must meet a working time requirement to qualify, so we have been increasingly looking to other tax-advantaged ways of providing share incentives.

The Company Share Option Plan has become more prominent as an alternative – particularly where a low valuation can be agreed with HMRC, as there is a low cap on the value of shares an employee can be granted under a CSOP at £30,000. (As mentioned by my colleague Thomas in his recent blog, this happens to be a good time to be agreeing low valuations with HMRC due to the impact of the pandemic on many small companies.)

A CSOP is fairly inexpensive to implement, has no tax implications for the recipient on grant and can result in only a 10% or 20% Capital Gains tax charge on sale of the acquired shares, if the option has been held for at least 3 years. Additionally, the company can avail itself of a corporation tax deduction on exercise, equal to the difference between the market value at exercise and the price paid by the employee.

The common understanding is that share schemes are used in high-growth companies or large established businesses seeking to incentivise senior management as part of a remuneration package. The CSOP, however, provides an opportunity for many small businesses to give employees an additional incentive to push growth in the company leading to a sale or acquire a shareholding to provide a dividend stream or starting point for a management buy-out.

It may not be talked about as often, but the CSOP provides obvious benefits to companies and individuals who would fall foul of the EMI qualifying criteria. The tax implications are certainly more advantageous than simply issuing shares to employees, as discussed by my colleague Sarah recently.

Our team are experts in advising companies on the best share scheme and how to structure to ensure the maximum benefit for the company and employees. In the case of a CSOP, a valuation must be agreed with HMRC in advance of granting options. Talk to us to find out more about how this could benefit your business.

Brexit is done, so roll on amendments to EIS

This post is part of our Entrepreneurial team’s regular series of blogs.

Many within the investment industry have been frustrated at the restrictions placed on SEIS and EIS by virtue of compliance with EU legislation.

Whatever your political persuasion – this article is deliberately apolitical – it is clear that Brexit offers an opportunity for HM Treasury to make amendments to the SEIS and EIS schemes, without breaching EU law. It would appear that with this in mind, the EIS Association (EISA) has written to the Chancellor and laid out proposals to improve these schemes.

SEIS is de minimis state aid, meaning that there were limits around the quantum of investment that could be received and also that EIS is a Notified State Aid, providing the EU with influence over its rules and application.

Such influence was most notably exercised in 2015 when HM Treasury instigated changes to EIS because it needed EU reapproval of the scheme. These changes included a termination date for the EIS scheme; a maximum age of the company requirement and restrictions on which investors qualified, how money was to be spent, and which companies qualified; and the promotion of “Knowledge Intensive Companies”. With the exception of the last point, these changes were not welcomed by most and fundamentally changed the investment landscape. In my opinion, for the worse.

The EISA’s letter, timeously issued in advance of the March Budget, sets out its recommendations for changes to these schemes. I applaud their actions, having written several articles in the past stating my desire for positive and progressive post-Brexit changes to the EIS scheme. Their recommendations, together with my own thoughts, are listed below:

Immediate change – i.e. from 3 March 2020

1. Increase the maximum level of SEIS investment from £150,000 to £250,000.

The majority of start-up companies we see seeking investment look for around £250,000 in their first investment round. As the rules currently stand, investors need to seek the first £150,000 to be SEIS and the remaining £100,000 to be EIS. The effect of which, to be compliant with the SEIS rules, is that the investment must be tranched over two days. This added complexity requires more detailed and correspondingly expensive investment agreements to be drawn up, as a result of which I have seen investments falling through.

Autumn Budget changes – likely to be around mid-November

2. Replace the Age Restriction with a more appropriate threshold

5 years on, the maximum age restriction is still the EIS change that prompts the most questions to our @LINC Scotland EIS Helpdesk from investors. In a nutshell, older companies do not qualify unless

  • i) they have previously taken EIS investment and are seeking to further fund that activity; or
  • ii) are trying to do something very different and are raising a significant sum to finance it.

I see half a dozen good companies every year which need investment and cannot get through these rules. They are left out to dry. The EISA do not advocate simply throwing open the doors to all companies, but replacing this (unfair) test with a (fairer) test that reflects the size, not the age, of the business.

3. Ministerial assurances that EIS will continue beyond 2025

If we are to succeed as a country, investment in innovation is critically important. Banks simply will not lend to most early stage businesses, so these businesses need to turn to investors to get going, fund their growth and fund their expansion. The EIS scheme is a significant job creator, with 4 new jobs created for each £1m invested according to the EISA. When the 10-year scheme limit was enacted, much consternation was expressed. We are now over half way through that window and need to have assurances that the scheme will continue.

4. Reducing the admin burden

We live in a digital age in which all PAYE information is instantly known to HMRC; all VAT information is reported instantly to HMRC; and all accounts and tax returns will soon be instantly reported to HMRC.

By comparison, EIS is reported through a combination of a manually-completed document that prompts HMRC to issue a PDF certificate, authorising the company to prepare and issue forms to the investors who then can manually complete it and submit in the tax returns or directly to HMRC. This is archaic. It should be possible for the post-EIS investment form to be digitally uploaded and, once accepted by HMRC, each investor’s tax recorded updated to record the investment.

Final thoughts

In addition to the above, EISA also recommends HM Treasury investigates how money held in pension funds can be used to fund EIS and SEIS qualifying companies and how to raise the profiles of EIS and SEIS investments.

The EISA letter is first class. It is a well researched, well presented and well thought-through request for support. Support that the government can provide without massive cost to the exchequer, and that will enable the economy to grow.

The cost of COVID: tax rises in the Budget?

This post is part of our Entrepreneurial team’s regular series of blogs.

In seven weeks, the Chancellor will deliver a Budget to the House of Commons that is widely expected to contain tax rises. There is, as there always is, excitement as to which taxes and by how much. The majority of commentators over the last few months – me included in December – seem to align with the theory that Covid support must be paid for and that the two taxes most likely to face increases are Capital Gains Tax (CGT) and Corporation Tax (CT).

CGT is divisive. Politically troublesome at least. Some people believe that it should never have been introduced (as it was in 1965) because investments can only be made using income on which tax has already been paid – so CGT provides a second bite of the cherry for HM Treasury.

Others think that it is a legitimate tax, but is rightly assessed at lower rates than Income Tax.

Still others believe that it should be increased to align with Income Tax rates. At present, there is a considerable difference between these rates, with the majority of gains taxed at 10%-20% while Income Tax is charged at 20%-45% in most of the UK and 19%-46% in Scotland.

The Office of Tax Simplification recommended in November to move the CGT rates to 20%-40%, whilst simultaneously reducing the annual exemption from CGT from around £12,000 to around £3,000. Taxpayers paid £9.5bn in CGT in 2018/19, so, in theory at least, there is around £10bn a year in extra tax up for grabs, should the government choose to move on these recommendations.

CT is also divisive, but for different reasons. It provides an opportunity for governments to make their country a destination of choice for companies to base themselves – companies that then hire staff, who pay income tax, national insurance and VAT when they buy things, stimulating the economy. The net receipts from these taxes dwarf those from CT, thus, perhaps counter-intuitively, lower rates of CT are more commonly seen as progressive and opportunistic. Kind of a loss leader. Ireland, with its 12.5% CT rate, is the most relevant example of this as it has firmly established itself as a competitor, albeit a friendly one, to the UK.

So, that is the theory, but what about the practice?

Fact: the UK is going to need money. Lots of it. COVID support is running the UK – and the global economy – into a borrowing spree the likes of which has not occurred in my lifetime.

Ask ‘the man on the street’ what they’d prefer – owners of assets and companies paying more tax, or a penny on Income Tax? – and I will bet all the money in my pockets that they would say the former. So when tax rates need to move, it seems likely it will be CGT and CT.

But we find ourselves again in a national lockdown. Officially this will run until the end of January in Scotland, with the option to extend, and in England the Prime Minister hinted yesterday that maybe this would be closer to Spring. Millions are furloughed. Is 3 March, when there is every chance the country will still be locked down, really the time when Mr Sunak will make his move? I am not so sure.

I am sure, however, that the only way to guarantee the current CGT rates will apply is for assets to be disposed of before 3 March. It is, at least in part, for this reason that we are currently seeing unprecedented levels of corporate restructuring activity – Mergers and acquisitions, Management Buy Outs, Share Repurchases and Employee Ownership Trusts being established. It makes sense to move now, all things being equal. But seven weeks is not much time to get a transaction through. There is much to be done.

Top tech in 2020: gadgets that have kept me smiling

This post is part of our Entrepreneurial team’s regular series of blogs.

For the Entrepreneurial Tax blog this week I’ve decided to throw a curve ball. Rather than write an informative tax piece, I want to highlight some of the technology that has kept me sane over the past year.

I’ve always been interested in tech and the nature of my job allows me to play with some seriously cool pieces of kit now and again. Below are some of my favourites gizmos in what has been a very “meh” year. Don’t worry, our informative tax pieces on EIS relief, EMI share valuations and R&D Tax will continue in the new year.

(None of the below are sponsored in anyway and if there are any cool pieces of technology that you recommend, drop me a message!)

Ooni Koda Pizza oven – This portable pizza oven allows you to cook authentic, Neapolitan-style pizza in 60 seconds right in your back garden. With its patented design, it can reach 500°c in 10 mins and is a real game changer when it comes to homemade pizzas, making even the most incompetent chef look good.

Höfats Spin – A bioethanol table fire that provides a 500% boost to the mesmerising flame due to its rotating and clear-glass chimney effect. This year we have spent as much time outside as possible, and this light and heat source continues to be used well into the winter months. At the forefront of innovative German design, it’s a win-win in the Philp-Heidl household.

Hoverboard Go Kart – My best friend’s son received this as a Christmas present and to say that I was disappointed that I’m outwith the suggested age and size requirements is an understatement. This adaptation to last year’s Christmas craze converts the hoverboard into a Go-Kart with a unique petal design and auto-balance features. Its two powerful motors can reach up to a speed of 15km/h!

Xbox Series X – Sadly my claim for this on the grounds that it was required for “work” to review Video Game Tax relief claims was, unsurprisingly, unsuccessful. The fastest console ever developed delivers true 4k gaming and still plays some of my 20-year-old video games.

From the Entrepreneurial Tax team we hope that you all have a happy new year!

Will 2021 see HMRC pursue promoters of tax avoidance, as well as higher taxes?

This post is part of our Entrepreneurial team’s regular series of blogs.

“A cardinal principle”. A flash of red, the sweep of a cardinal’s cassock across the page; the invocation of churches, religion, a sense of immutable, unchanging and unquestionably ‘right’ things. It was a pleasant surprise to find some colour in the HMRC document on tax avoidance[1], which was otherwise written in ‘plain English’.

Interestingly, usage of “cardinal” peaked in the 1760s and has now slumped to 1/20th of that peak, with a particularly strong decline in the last hundred years. Because things do change, have changed, and are changing. Tax avoidance was once largely seen as socially acceptable, as opposed to tax evasion. Think about the Duke of Westminster and his gardener in the 1930s, carefully stepping across the schedules of the income tax Act by seeing only clear and crossable cliff edges drawn by the wording (and having the court – the House of Lords – bless the resulting reduction of the Duke’s surtax bill). Now, think about Amazon or Google – or any big enterprise – having to heed not only the explicit wording of the tax legislation, but also its purpose, as well as the “keep off the grass” (no matter how careful each step) signs of public outcry and HMRC’s (and the courts’) direction of travel, along with a host of anti-avoidance (or, more evocatively, “anti-abuse”) rules. There’s a choppy sea now between the cliff edges.

That’s not all that’s changed. Tax avoidance has filtered down. No longer the preserve of dukes and others able to afford bespoke tax advice, tax saving schemes are now often targeted at the mass-market – one very 2020 example being the targeting of NHS staff (many returning to work in the wake of COVID), with the promise by scheme promoters that they can pay less tax on their employment income. In a way that is legal, promoters promise – it’s not tax evasion. “Look”, they say, “here’s a QC opinion saying it works, and it’s got an HMRC number – it’s registered with HMRC.” HMRC states it wants to educate these taxpayers on the risks of becoming involved with such schemes – risks of HMRC challenge: tax costs, penalties, legal costs. But public anger is directed more at the promoters. They are seen as taking advantage of low paid groups: clap for carers, not chase them for tax, not charge them scheme fees and disappear with the profits when HMRC comes knocking.

HMRC has benefitted greatly from the change in attitudes that has seen tax avoidance become less and less acceptable. For many people, avoidance now blurs into evasion; both are ways of paying less than “your fair share” of tax, with the distinction just depending on whether or not you can afford tax advice to find a technical way to step around the rules rather than get caught up in them. HMRC must now take the next step of taking on promoters, especially repeat offenders. Pursuing taxpayers who are dependent on employment income is relatively easy – they generally aren’t going far. Pursuing promoters who take large profits from selling tax avoidance schemes will be more difficult. HMRC is consulting on proposed new legislation that will give it additional information and prosecution powers to deal with promoters. Logically, the lost tax, or the profits of the scheme, could be sought from the promoters.

A change in mindset may also be required by HMRC. The “cardinal” principle that HMRC referred to in the consultation document was that taxpayers alone are responsible for their own tax affairs – hence HMRC wanting to educate them to avoid promoters, and hence HMRC pursuing them and not promoters. However, given the complexity of the tax system today, that cardinal principle has to be under serious strain. Even very many of the most business-savvy individuals struggle to understand its complexities or rationale, and their involvement in their own tax affairs is limited to passing information to their tax advisor. Given that, it is understandable that those who are not involved in business (or in interpreting voluminous and complex tax legislation) in their day job would wish to do the same, and so be attracted by promoters claiming to understand the system and be able to save them tax.

The complexity and rationale of the tax system is a subject for another day (and another HMRC consultation or two!). For now, HMRC is analysing the feedback to its consultation document. Let us hope that HMRC recognises that, just as has happened to date with the evolution of opinion on avoidance, public perceptions of fairness and responsibility in relation to tax continue to change.  If new powers to deal with promoters do come into being, HMRC will have new tools to enable it to adapt and take a stronger stance in actively pursuing promoters and their profits, rather than clinging too firmly to a cardinal principle that may no longer be as hallowed as it once was. 2021 may then herald a pursuit by HMRC of both further tax revenues (due to widely anticipated tax rate rises) and of serial promoters of tax avoidance.

[1]https://www.gov.uk/government/consultations/tackling-promoters-of-tax-avoidance

Giving an employee shares? Make sure you understand the tax implications

This post is part of our Entrepreneurial team’s regular series of blogs.

Gifting an employee shares in a company is often used to incentivise and reward key employees within a business. However, doing so may result in the employee being liable to pay income tax on the award.

This is because where shares are simply issued or transferred to employees for no consideration, or for less than their market value, the employee will be subject to income tax on the market value of the shares less what they paid for them.

There could also be capital gains tax or inheritance tax implications for you as the person making the gift.

Consider whether there is a more tax efficient way to do it…

There are lots of different mechanisms through which you can get shares into the hands of your employees. These include through tax-advantaged schemes such as EMI and HMRC-approved CSOP schemes, as well as through unapproved option schemes which, while less tax efficient, provide more flexibility. Bear in mind that EMI options can be granted by individuals who hold shares (as well as by the companies), and that – wherever possible – EMI tax benefits mean it is worthwhile trying to use this route if you can.

Ultimately, a simple, outright gift of shares may be the best route for you, but before you jump into gifting shares you should be aware of the tax consequences for both parties and consider whether there might be a better way to achieve your aims. We recommend speaking to a tax advisor to create a solution that’s right for your company and your employees.

Know what your shares are worth

We would recommend that you have a share valuation undertaken in order to determine what the market value of your shares are so that you know what the tax charges will be in advance of transferring the shares. We can assist with this.

Consider a section 431 election

If you do go down the route of the employee immediately acquiring shares (as opposed to an option), consider s.431 elections – these are very often desirable to save on income tax. Often private companies’ shares are ‘restricted securities’ for tax purposes due to restrictions on their disposal, within the company’s Articles, which affect the value of the shares. Where these restrictions exist an election, known as a s.431 election, can be entered into jointly by the employer and employee within 14 days of the acquisition.

This election opts the recipient of the shares out of the restricted securities taxing regime. As a result, the employee will have a higher income tax charge on the acquisition as it is calculated on the higher unrestricted market value of the shares (which ignores the restrictions that apply to the shares) BUT on the eventual disposal of the shares the employee will only be subject to capital gains tax – no further income tax under the restricted securities regime will arise.

Where no s.431 election is entered into, a further income tax charge will arise on a “chargeable event” – such as where restrictions are lifted or the shares are sold on to a third party. Usually it is in the individual’s favour to enter a s 431 election to avoid such further income tax charges. It can also save the company the cost of employer’s NICs, as explained below.

Does the income tax need to be paid via PAYE?

If your shares are considered to be a readily convertible asset (RCA), either by being capable of being sold on a market (such as the London Stock Exchange) or through other trading arrangements being in existence (such as an exit being about to happen), income tax due will be charged via PAYE with Class 1 employers and employees National Insurance contributions also being due. Class 1 NIC is currently paid by employers at 13.8% (on top of the employee contribution). This can, therefore, add up to a significant additional tax charge; assuming the employee is a higher rate tax payer this would result in an overall tax charge of over 55%. Further, the employer’s NIC may be an unexpected cost to the company.

Where the shares are not considered to be RCAs then income tax is payable via the individual’s self-assessment tax return, and NICs are not relevant.

Be aware that whilst the shares may not be an RCA at the time of acquisition (gifting), they could be RCAs when the individual comes to sell them e.g. if they are sold on an exit where there is a buyer in place for the company’s entire share capital. This would mean that if a section 431 election had not been entered into, the further income tax charge arising on disposal of the shares would be payable via PAYE and the employer’s NICs would represent a cost to the company.

Know your annual reporting obligations

Where an employee (or director) has acquired shares in the company it has an obligation to report this acquisition to HMRC via an annual Employment Related Securities (ERS) return. This should be submitted to HMRC by 6 July following the end of the tax year. We can assist with this.

What if the employee leaves?

We would recommend speaking to your lawyer to make sure you’ve got the right provisions in place in your Articles of Association to deal with what should happen to the employee’s shares if they leave the company. Would you want an obligation on the individual to sell the shares back or not and, if so, at what price?

To gift or not to gift?

Ultimately, whilst gifting shares to employees is often viewed as a simple matter, doing so can give rise to tax liabilities as well as reporting obligations. While this blog provides general advice on some points to be aware of, you should always seek tax advice specific to your own circumstances before gifting shares.

We would be happy to assist you with this. If you are considering gifting shares to your employees or granting them options over shares, please contact us.

EIS: don’t go chasing waterfalls?

This post is part of our Entrepreneurial team’s regular series of blogs.

What is a waterfall?

A liquidation preference, often termed a ‘waterfall’ provision, is usually put in place by third-party equity investors to minimise their downside risk. The preference works to ensure that the third-party investors receive their investment back first in the event of a sale, winding up, or liquidation, in priority to the other shareholder groups.

Although this is quite common, particular care must be taken if the investors participating in the waterfall include any Enterprise Investment Scheme (“EIS”) or Venture Capital Trust (“VCT”) funds or individuals hoping to claim (or who have claimed), to ensure that their ability to claim these relief is not prejudiced. The rules regarding EIS and VCT relief prohibit shares from qualifying if they carry “any present or future preferential rights to a company’s assets on winding up”.

This rule is in place to ensure that EIS and VCT investments remain ‘risky’. Investment through these methods must genuinely be ‘at risk’ and, therefore, should not be protected by any preference rights.

Although you may think that these rules remove the possibility of including a waterfall provision in the articles of a company, they are still very prevalent in high-growth companies… but how do they get around this?

How to implement a waterfall and remain qualifying

There are two main ways to ensure compliance with this while still delivering the protections desired by the investors.

  • The first option looks at the different types of exit that a company can make. The EIS rule specifically prohibits there being any present or future preferential right to a company’s assets on winding up. Importantly, the rule only specifies winding ups, meaning the use of a preference waterfall in the event of a sale of the company is permitted.
  • The second option looks to distinguish between the priority of when the assets are received, rather than the amounts received. It is widely accepted that HMRC only pay specific attention to the timing of when there is a right to receive assets, not the amounts to be received. This means that as long as each group of shareholder receives ‘something’ at each stage of the preference waterfall, there is no preferential right to the return of assets. This is usually executed by giving one group of shareholders the right to receive 99.999% of their issue price at the same time as the others receive 0.001% of theirs. The subsequent level of the waterfall would then reverse this. This mechanism provides the desired level of protection to the first group of investors.

These methods are generally understood to be accepted by HMRC, as they have not challenged it to date. However, with the way the legislation is currently written, it is still open to HMRC to change their view on what it means.

Much ado about nothing?

Although there are ways to implement preference waterfall provisions into return of capital provisions, the legislation is complex and there is always a real risk of prejudicing an investor’s EIS or VCT relief if care is not taken.  We suggest you get specialist tax advice before implementing such provisions.

Never knowingly undersold: employee ownership tax breaks work

This post is part of our Entrepreneurial team’s regular series of blogs.

Employee Ownership works. It works for the employees; it works for the previous owners; and it works for the customers.

The premise is straightforward – if all employees participate in ownership, they will work harder, be more productive and share in the benefits.

The model on which Employee Ownership Trusts (EOT) were based is the John Lewis Partnership. Admittedly, John Lewis appears to be struggling recently, but for over a century has been at the forefront of customer service and employee ownership. I have more insight than most in this assessment, having spent 5 years working in their Edinburgh branch in my youth. I recall, with more than a little guilt, being told off – not by my managers, but by my peers – for not pulling my weight. “That’s my bonus you’re wasting” was a regular put-down. This sense of collective responsibility resulted in better staff who provided (in my opinion) better levels of customer service than competitor shops and, in turn, earned a greater level of customer loyalty.

It works. Plain and simple, it works.

“So what?” you may ask. Which brings me to my point… I fear that EOTs may not survive a spring tax hike.

When EOTs were introduced in 2014, a coalition government was in power. It was the Liberal Democrats, Vince Cable specifically, who heralded their use. I worry that, in a time when commentators are unanimous in their belief that taxes will rise next year, their removal might be an easy grab.

EOTs offer exceptionally generous tax breaks:

  • a Capital Gains Tax (CGT) exemption for the owners of the business who sell their shares into an EOT; and
  • annual bonuses of up to £3,600 tax free for the employees.

We have seen a notable increase in clients asking about EOTs recently. Underpinning this is a common desire to enable their long-serving staff to benefit in their succession planning. In many cases, it is the tax benefits offered through EOTs which are making this opportunity, as opposed to a more traditional MBO, highly attractive. There are also a range of ways the business can fund the EOT to acquire the shares, so it doesn’t require employees to put their hands in their pockets to buy the shares off departing shareholders.

I might be wrong. They might continue indefinitely. But I might be right and, if so, the tax differential for owners could be huge. If the government follows the advice of The Office of Tax Simplification in their report of November 2020 – and pushes CGT rates to 40% in March and at the same time removes the EOT tax breaks – then an individual selling a business for £10m in April could pay £4m in CGT, as opposed to nil on a sale into an EOT right now.

If you are thinking about succession; if you are thinking about selling your business; if you are thinking about your employees, then now might be the right time to explore Employee Ownership. We are here ready to support you in this.

Raising standards in the tax advice market – how do you choose a tax adviser?

This post is part of our Entrepreneurial team’s regular series of blogs.

Tax advisers, their reputation and the risks to clients of making the wrong choice in selecting one, are under the spotlight like never before.

HMRC have published a summary of responses to the call for evidence and next steps, in relation to the recent consultation on raising standards in the tax advice market (the full outcome can be found here).

An independent review into the tax advice market in 2019 highlighted varying levels of standards and cases where taxpayers received advice that left them open to substantial tax bills. While the majority of tax advisers are technically competent and adhere to high professional standards, it was found that some advisers were displaying incompetence and others were actively bending or breaking the rules.

This prompted HMRC to open a consultation into improving the standards of advisers across this field. Their aim was to help taxpayers make informed decisions when seeking tax advice, to assure them that the advice they receive is competent, professional and trustworthy.

The consultation highlighted indicators of tax advisers with high standards that taxpayers should consider, when selecting a tax adviser. These included:

  • Holding accountancy qualification(s)
  • Having relevant experience
  • Complying with the PCRT (Professional Conduct in Relation to Taxation), including ethical practice
  • Not taking shortcuts
  • Acting transparently
  • Seeking to educate clients
  • Undertaking due diligence on clients
  • Recognising their own expertise and whether they are appropriately placed to offer advice
  • Having professional indemnity insurance
  • Being a member of a professional body
  • Being registered for anti-money laundering supervision

C+T meets all of the above points and consistently provides high quality standards to all of our clients, whether that be for compliance engagements or providing more complex tax advice. We have specialists across many aspects of tax who can help in areas such as, but not limited to, Capital Allowances (CAs), creative industries tax reliefs, R&D tax relief, (S)EIS, share schemes and VAT.

As we are accountants, we understand the bigger picture in relation to how these areas of tax interact with compliance requirements and can help companies utilise any available tax reliefs in the most efficient manner, and in a way that fits with their long-term strategy.

For more information on how the Chiene + Tait team can help you, contact us today at mail@chiene.co.uk or call 0131 558 5800.

EMI – A great time to agree a share valuation with HMRC

This post is part of our Entrepreneurial team’s regular series of blogs.

This year, with the significant ongoing impact of Covid-19, many companies may find themselves unable to offer their employees a pay rise or bonus, instead looking for alternative means to reward and retain their workers.

One excellent method of incentivising employees to stay with the company and participate in its growth is through a share scheme, which can offer generous tax advantages if it is a tax-favoured scheme. Enterprise Management Incentive (EMI) schemes are by far the most popular such scheme.

For companies with an existing (EMI) scheme, or those looking to set up a new share scheme, the current economic uncertainty means this is a great time to agree a share valuation with HMRC. A share valuation, agreed by HMRC, is key to ensuring the EMI option recipients have certainty of taxation consequences.

The normal starting point which HMRC considers when valuing a company is the price paid by any recent (within the last 12 months) third-party investors. This third-party price can then be discounted significantly to account for the minority shareholdings that EMI options are usually granted over, and the enhanced rights that may be given to other shareholders (generally investors) through the Articles of Association or Investment Agreement. Even with a significant discount on the value of the shares from the third-party price, employees can still end up needing to pay a hefty price when the time comes to exercise their options, reducing their eventual gain when their shares are sold.

Companies that had received investment before lockdown and have seen their business falter due to lockdown may be able to argue that the price paid by investors is no longer a fair representation of their share value, with investors having relied on forecasts and business plans which are no longer achievable. This opens the door to using another method of valuation – the earnings basis, for example, which for early-stage companies with significant development costs often allows for much lower valuations than using the last third-party price paid.

Currently, HMRC is also offering companies an extended time frame to grant options once a valuation is agreed.  This has increased from the usual 90 days to 120 days. This has helped ease the administrative burden that comes with granting EMI options, as companies and their lawyers have longer to draft option agreements and have their employees sign them, which is currently more difficult than normal with so many working from home.

These factors make this an ideal time to offer employees EMI options. Doing so helps to incentivise key employees who recognise a business’ growth potential to remain in their roles and work to maximise their potential future gains on shares in their employer.

To get a share valuation prepared, and agreed with HMRC, please contact us.

Can a director qualify for EIS relief?

This post is part of our Entrepreneurial team’s regular series of blogs.

This is a frequently asked question for the Entrepreneurial team. The short answer is “yes”, provided certain conditions are met.

  • If you are an unpaid director, then you will qualify.
  • If you are going to become a paid director, you can still qualify if you get the timing right…
    • You must subscribe for (and be issued) shares in the company before you become a paid director (and before you became entitled to any pay);
    • Those initial shares will then qualify for EIS and will also buy you a “grace period” of 3 years to make further EIS qualifying subscriptions.
    • After that 3 year grace period is up, you will no longer qualify.
    • Your pay must be “reasonable” i.e. not excessive for the role

Many exec and non-exec directors will meet these conditions and qualify for the key EIS tax reliefs (a deduction of 30% of the amount invested against their income tax and a CGT-free exit provided the shares are held for at least 3 years).

For those who don’t, it is worth noting that there is one other form of EIS tax relief available which can be claimed despite not meeting the above test and so not qualifying for those tax reliefs noted above – this is CGT deferral relief, a.k.a. reinvestment relief. This often-overlooked relief allows you to defer paying CGT on other gains you have made to the extent that you reinvest those proceeds into shares in an EIS qualifying company. The CGT that would otherwise be due is deferred until sale of those shares.

Of course, even if being a director does not prevent you qualifying for EIS, there are many other EIS conditions you could fall foul which could prevent you being able to claim income tax and CGT-free disposal reliefs. Ones to watch out for include: your children or spouse becoming an employee of the company or your shareholding, together with theirs, exceeding 30% during your 3-year holding period.

Current Position of the Scottish Investment Market

In this new blog post, Neil Norman Entrepreneurial Tax Partner at Chiene + Tait gives an overview of the current position of the Scottish investment market and the impact Covid-19 has had on investments.

Trends and changes

Covid-19 has triggered major changes in the Scottish investment market. We have seen many companies seeking funding, but fewer new investments made. Rather, the observed trend has been for investors to first seek to ensure that their existing portfolio companies continue to be supported. There is also a second trend – many of the investments made into existing investee companies are being tranched. For example, a company seeking £2m follow-on investment, may need to accept that it can receive £750k now and the balance in, perhaps, 6-12 months. This strategy, whilst sometimes frustrating for the recipient, appears sensible as investors seek to mitigate their exposure to the risk of a loss in an uncertain, macro-economic market. Whether the lack of certainty or ‘runway’ will adversely affect the fortunes of the investees remains to be seen, but those companies I have spoken to in this situation seem accepting of the investor’s logic and not overly concerned.

Valuations

In the early days of lock-down, we noted a significant shift in valuations being offered by some investors. However, anecdotally expressed concerns that this was the start of an era of opportunism appear to have been unfounded. Rather, so long as the investees are able to carry on relatively unabated with their plans to develop their intellectual property, their investors have been supportive with valuations that typically mirror those seen in the pre-Covid world. This is testament to the strength of the Scottish investment market and the integrity of those operating within it.

Support for Entrepreneurs

Support for entrepreneurs in Scotland remains amongst the best in the world; we have the most mature and one the most advanced early-stage investment markets. Since Archangels commenced investing in the early 1990s, there are now over 20 active angel syndicates and many funds operating here. Then, add in the support offered by LINC Scotland to the investor groups (including our EIS Helpdesk), the availability of match funding from the Scottish Investment Bank, the Covid-support measures introduced by the Scottish Government which are widely accepted as being better than the UK Government’s offerings, and the plethora of investment opportunities, many of which have come from world-leading research institutions, and it is clear that Scotland remains an extraordinary location for investment activity.

Author – Neil Norman, Entrepreneurial Tax Partner, Chiene + Tait

What qualifies as ‘Research & Development’ in the eyes of HMRC?

In this blog, Head of Research & Development Tax at Chiene + Tait David Philp uses specific sector examples to outline what does and does not qualify for tax purposes.

Research and Development (R&D) has a specific statutory definition for tax purposes, but what does this mean for companies that wish to apply for tax relief? To qualify for R&D Tax Relief, a company must be carrying out research and development in the field of science or technology. This can include creating new processes or products, make appreciable improvements to existing ones, or use technology or science to duplicate existing processes in a new way.

If you are:

  • Working on something that hasn’t been attempted before,
  • Making an existing product faster, cheaper and more reliable; or,
  • You have found a more-efficient way to work

You will likely qualify for relief; the question is how much. It can be difficult to identify where a project starts and ends as determined by HMRC’s requirements. Below are some sector-specific examples of what elements of a project will and won’t qualify for the relief.

The Construction Company

Rows of yellow hard hats

The company created cladding which looked like ‘normal’ brickwork, but incorporated the capacity for offsite fabrication.

What qualified?

The cladding improved fire protection and suitability to fast-track production. Mechanical fixing, rather than wet mortar, provided strength and durability, which together with the all-weather construction made for significant cost savings.

The uncertainty of which materials should be used in the cladding system and the technological uncertainties surrounding the mechanical fixing were the qualifying R&D element.

What didn’t?

The time spent pulling together information to patent the design was ineligible as the technological uncertainty had already been resolved. If the cladding system had been based on factory builds, and the company simply applied the technology to house builds, the project would have been ineligible as the advance in technology had already been achieved.

The IT Company

A row of colourful network cables plugged into a serverThe company developed a software platform that integrated with various 3rd parties.

What qualified?

Each object on their platform had to be programmed to interact with all the surrounding objects. As the platform became more complex, more objects were introduced, and the amount of code required rose exponentially. The solution was to programme the properties of each object so that interaction was built-in to the functionality.

When the objects interacted, a separate code wasn’t needed because the inherent properties produced the outcomes. The qualifying expenditure on developing this innovative code qualified for R&D relief.

What didn’t?

Whilst significant time was spent testing the code, testing that did not feed back into the design or development stages of R&D did not qualify for relief. In addition, time spent developing generic/simple code (improving the UI for example) is not eligible.

The Manufacturing Company

The company sought to build a lighter and cheaper engine than what was available off-the-shelf.

What qualified?

The work involved making the new engine substantially lighter, cheaper, and faster to produce than any currently available. As the project looked to make an appreciable improvement to an existing process, this qualified as R&D. It’s useful to note that, even if a secretive competitor had already built a new engine and made the same intended improvements, the project would still have qualified because the details of how this was achieved aren’t in the public domain.

What didn’t?

Researching the baseline knowledge and capability in the field, and identifying a gap in the market for the company to exploit did not qualify, as this is prior to the R&D project for tax purposes. Minor and routine adjustments, such as incorporating slightly better spark plugs, already designed and used in another vehicle, did not qualify.

The Life Science Company

The company sought to develop a drug that reduced the risk of a stroke.

What qualified?

Creating a new drug, up to and including Phase III trials, was a qualifying project as it was attempting to overcome scientific uncertainties. The salaries of the scientists and their laboratory assistants doing this hands-on R&D qualified, along with consumable items used and transformed in the R&D process.

What didn’t?

Time spent achieving important regulatory FDA approvals did not qualify, because any uncertainty in achieving these is part of the regulatory requirements, not science or technology.

The Food & Drink Company

Colourful cupcakes

The company sought to create a new recipe that reduced the level of sugar in a drink, whilst maintaining the same taste.

What qualified?

Time spent trialling and testing ingredients that feed into the development stage qualified for R&D relief. Ingredients wasted during this process also qualified as they were used and transformed in the R&D process, as well as time spent re-calibrating the machinery to successfully produce the new drink.

What didn’t?

Market research to determine whether people preferred the new taste was ineligible as did not overcome a scientific or technological uncertainty, and did not feed back into the development of the product.

If you have a query about what does or doesn’t qualify for Research & Development Tax Relief contact David today at david.philp@chiene.co.uk or call 0131 558 5800.

Research & Development Tax Relief: ways to maximise your claim

Our team of full-time Research & Development (R&D) Tax Relief specialists has highlighted the key areas where there are opportunities to maximise your R&D claim that can be commonly missed:

 

Grant funding

Companies often incorrectly believe that receiving grant funding means that they are not eligible to claim R&D tax relief. This is not the case; the receipt of a grant can, however, impact upon the level of relief a company is entitled to claim.

Depending on the type of grant received it can cause some or all of the qualifying project expenditure to be ineligible under the R&D SME scheme, potentially for the entire life of the project. A specialist R&D advisor will be able to apply the detailed legislation to each of your projects to ensure you claim the maximum amount of relief you are entitled to.

An experienced advisor will also be able to help you to proactively maximise your R&D claim in relation to grant funding. If you are considering applying for a grant, our team can guide you on how to structure your application to ensure that it does not adversely impact upon your R&D claim.

Customer contracts

There is also a misconception that when a company has been approached by a customer to undertake R&D that these activities are not eligible for relief. In fact, depending on the factors specific to each engagement you may still be eligible for relief. Our specialist R&D team can review customer contracts to determine if a claim is eligible and we can also proactively review contracts to ensure any new projects are eligible.

Investments

A claimant company is required to include the accounting data of other entities if they are considered to be ‘linked’ or ‘partner’ enterprises. Aggregating this data can cause a company to breach the SME thresholds for R&D purposes, making the company ineligible for relief at the preferred rate.

This is something that should be considered when carrying out an investment round. Our R&D team can advise whether a proposed investment will breach any of these limits.

Dividends

It is common for directors to take dividends, rather than putting themselves on the payroll, to avoid paying money through the PAYE scheme that could otherwise be invested back into the business. However, dividends are not a qualifying cost for R&D tax relief purposes and, as such, cannot be included in a claim.

As employees’ and directors’ gross salaries are a qualifying cost, it may be worth considering adding any directors to the payroll and paying them below the personal allowance and national insurance thresholds, so no PAYE or NIC are payable, and pay any further remuneration as dividends.

Staff versus Freelancers

In the early stages, many companies will outsource work to specialists or utilise subcontractors and agency workers. For SME claims, costs spent on engaging with subcontractors and agency workers will be restricted to 65%. Furthermore, if you are claiming under the RDEC scheme, there are multiple restrictions on third party costs – as well as a payable PAYE/NIC cap. This means you may not be able to claim any of the costs incurred.

Third party costs

Subcontractor and externally provided worker costs, in most cases, require a statutory restriction of 65% to be applied. However, if a third party is considered to be ‘connected’ to the claimant company or if an election to be treated as connected is made, relief for 100% of the costs can claimed.

Here at Chiene + Tait, our R&D specialists have years of experience preparing and submitting successful claims for hundreds of companies, across both R&D schemes (RDEC and SME), in multiple industries.

If you are considering claiming relief and would like to hear how we can help you, please email us at RDtax@chiene.co.uk.

 

Research & Development tax relief: common mistakes we see on claims already submitted to HMRC

Here at Chiene + Tait, our team of full-time Research & Development (R&D) Tax specialists work with many different sized companies across various industries. Whilst the majority of our work is first time submissions, we also review and amend previously submitted claims. Time and again we see companies over and underclaiming their eligible relief due to the complexities of the legislation. Eilidh Hobbs, Entrepreneurial Supervisor, highlights key points to be aware of:

Grant funding

Receiving grants can impact upon the level of relief a company is entitled to claim, causing some or all of the qualifying project expenditure to be ineligible under the SME scheme, potentially for the entire life of the project.

Because many companies rely on grant funding during the start-up phase, they often describe their entire business model, including the R&D project, in their grant application in attempt to secure the funding. The grant application is used to determine which of the company’s activities are subsidised, so if the entire business model is described, the R&D project could be impacted by the grant. Therefore, it is important to keep this in mind when applying for grants and weigh up the potential benefit of an R&D claim vs the grant amount.

Contracts with customers

In some instances, if you have been approached by a customer to undertake work, R&D resulting from this still may be eligible for relief. Two of the main factors that need to be considered are whether the company retains the right to benefit from the IP generated and whether the company bears the economic risk. Any subsidised costs are ineligible under the SME scheme, but a claim can be made under the RDEC scheme.

Third party costs

Costs incurred on engaging subcontractors or externally provided workers are eligible categories of expenditure. The treatment of subcontractor costs is different under the RDEC and SME schemes.

Under the SME scheme, payments made to any type of party qualify, but a statutory restriction of 65% must be applied to these costs, unless they are a connected party or an election to be treated as an elected party has been made.

Under the RDEC scheme only costs incurred in engaging an individual, partnership or qualifying body can be claimed. These costs only sometimes need to be restricted to 65% and this depends on certain factors specific to the project.

Externally provided workers are only eligible for relief where a payment is made to a staff provider supplying an individual to the claimant company, therefore payments made to a self-employed individual do not qualify. Furthermore, if the externally provided worker is a director or employee of the claimant company these costs are not eligible. These costs should also be restricted to 65% if the parties are not connected.

Non-qualifying costs

We often see costs incorrectly included in claims that are not eligible for relief, such as those incurred on capital items, materials that go on to be sold in the ordinary course of business and rental costs.

Here at Chiene + Tait, our R&D specialists have years of experience preparing and submitting successful claims for hundreds of companies, across both schemes, in multiple industries.

If you are considering claiming relief and would like to hear how we can help you, please email us at RDtax@chiene.co.uk.

 

How can R&D tax relief help cashflow during the recession?

In this blog, Eilidh Hobbs in our Research & Development Tax Relief team highlights how the relief can provide a lifeline for qualifying businesses during the current recession.

Most, if not all, businesses have been affected in some way by Covid-19. Some have been lucky enough to see a surge in demand due to the nature of their business, but unfortunately many have been negatively impacted. This meant that management have had to move their focus away from long-term strategy, to managing day-to-day cashflow.

HMRC have introduced a number of temporary schemes and incentives specifically to support companies through the unprecedented pandemic. However, there are other permanent schemes that can also help businesses through these trying times, such as R&D tax relief.

Many companies are carrying out qualifying R&D activities but have not considered claiming tax relief in the mistaken belief that they don’t fit the conventional image portrayed of a pure R&D company.

HMRC’s definition of R&D applies to all industries and as long as your business seeks to achieve an advance in a field or science or technology, and in doing so is required to overcome scientific or technological uncertainties, you will qualify for the relief. The definition is wider than you would think. Chiene + Tait’s dedicated R&D specialists are happy to discuss any projects your business has undertaken to assess whether you may be eligible to claim the relief.

A claim can result in a generous cash tax credit, or a reduction to tax liabilities and you have two years from the company’s financial year end to make a claim – so you can benefit from activities and R&D investment in prior periods; up to three years prior. The benefit may also be with you quicker than you would expect as HMRC are currently aiming to process SME claims within 28 working days.

If you have a query about Research & Development Tax Relief, or wonder if your company can apply, contact Eilidh today on 0131 558 5800 or email eilidh.hobbs@chiene.co.uk.

How organisations can build resilience

In this blog as part of the Future Of… series, David Shadwell Accounts and Business Support Partner outlines how organisations can build resilience during tough times.

Businesses that are agile, flexible and opportunistic can thrive in a world of uncertainty. A truly resilient organisation has an ability to turn a crisis into a source of strategic opportunity.

Given we are now in a new normal, there are likely to be some key areas of opportunity critical for future success, digital, transformation, organisation, resilience and sustainability. Businesses must act faster than ever, creating cultural shifts required to enable truly digital organisations.

Leaders have to make high stake decisions fast to ensure the resilience of their operations as shifts in the market have happened and the importance of good, accessible data has never been higher. If we think about a resilient business as one that has, and is able to get, a good awareness of the current situation, understands its core vulnerabilities and has the capacity to adapt in a complex and dynamic environment, then it’s easy to see why good, accessible data is so important.

Even where a business model cannot change significantly, and therefore the business cannot pivot to any great extent, a digital business model can often provide a great customer experience earlier. The ability to gather large amounts of customer data then provides a platform to learn more about what customers really want, so you can continue to improve the experience. A great digital experience creates significant customer loyalty, which is hard to break, putting up barriers for any competition arriving later to the party.

Effective management of risk is the key to an organisation realising this full potential, creating competitive advantage and protecting shareholder value. The change management around this hinges on exciting the organisation about the change and empowering them to do things differently. If you would like to speak with David Shadwell please contact him today on david.shadwell@chiene.co.uk or call 0131 558 5800.

 

Photo by Ivan Bertolazzi from Pexels

 

My advice for anyone taking a remote tax exam

In this blog, C+T’s Fraser McCallum shares his experience of taking a remote tax exam to help him achieve his tax qualification, and what advice he would give others who are planning to take an exam remotely.

I was due to sit my final two exams on the ATT/CTA Tax Pathway at the start of May 2020 and, once passed, I would be a fully exam-qualified Chartered Tax Adviser. However, at the end of March the Coronavirus lock down came into effect, and The Chartered Institute of Taxation (CIOT) cancelled the majority of paper exams. Thankfully, one of my exams was only postponed and would be sat by ‘remote invigilation’ at the beginning of July.

Initially I was sceptical about taking an exam remotely, but keen to take advantage of writing my exam answer on my own computer. The exam in question was a case study with a big emphasis on structure and presentation. My theory was that the ability to re-organise and perfect a word document via a machine was surely a huge bonus, compared to writing it all out on paper.

Throughout the whole process, both the CIOT and my exam training provider were extremely helpful and provided masses of guidance, including a mock exam setup that allowed you to practice with the software with extensive FAQs.

As the exam neared I started to appreciate the various issues of remote invigilation. During the exam invigilators would watch and listen to all of the students via their webcams, so laptops and internet connections needed to be up to the task. Luckily my ‘system readiness check’ was a success and I was able to borrow a good webcam from the Chiene + Tait IT team. There were other interesting requirements too, all laid out in great detail in the CIOT’s FAQs:

  • I had to be sitting at a desk,
  • I had to have a mirror on hand and
  • My work environment had to tick a number of boxes, or I wouldn’t be allowed to go ahead.

The night before the exam an email from the CIOT outlining that some exams had already taken place, and third-party invigilation provider had experienced a few issues. They were only minor but gave me a sense everything was not going as well as expected.

On exam day, I had a start time slot and was paired up with an invigilator for the meticulous pre-exam checks. Among other things, I had to pan around the room with my webcam (including under my chair) and hold up all of my tax legislation books (I have 8!), front and back, and give them a shake!

I started my exam, and all was running smoothly. Then with 1 hour, 38 minutes to go a big error message popped up, and a few minutes later the exam software kicked me out! This was exactly what I had had nightmares about. Then ensued a half hour of sheer panic.

I attempted to find a help contact number, failed, loaded up the software again, waited several minutes for someone to acknowledge me and then had to go through all of the pre-exam checks again! Luckily, my session was recovered, and the timer had frozen, but I had been thrown completely off my train of thought and did the second half in fear of being kicked out again. Apparently, the more your connection fails, the less likely you will be allowed to continue – not the best environment to sit any exam.

In the end, I finished it and, hopefully, all was well. However, the overwhelming stress on the day came almost entirely from technology and not from the exam itself. One of my colleagues took several hours to even get access to her exam in the first place. It was not an ideal experience but unfortunately, it’s difficult to envisage any other way such important exams can be sat remotely. The CIOT have been very understanding of all issues; there will be big changes made before the next remote sittings in November.

My advice to anyone planning to sit the exams remotely in the future is:

  • Practice, practice, practice with the mock exam software provided, especially writing out a calculation or tax computation. You want to be as comfortable as possible with it on the day;
  • Do your exam somewhere your internet connection is rock solid, as the slightest interruption can kick you out of the software;
  • Talk to someone who has sat a remote exam. I would have loved to have had a chat with a co-worker who’d been through the experience before me;
  • Thoroughly read all of the guidance and FAQs, and drill into your head exactly what to do if you have a problem on the day. Remember, you can’t have any emergency notes on your desk!

Fraser McCallum is a Senior in the Chiene + Tait Corporate Tax team.

Jackie Fraser blog – how Scotland’s tourism sector can reopen after lock down

Tourism is one of Scotland’s most important and fast growing sectors contributing over £11bn to the nation’s annual GDP. Last year it employed around 218,000 people accounting for more than eight per cent of total Scottish employment. In 2018 total overnight tourism trips in Scotland reached 15.5 million, a rise of three per cent from the previous year. At a time when stay at home holidays are increasing, partly due to pandemic-related foreign travel restrictions, it’s worth noting that UK residents already account for 12 million of those trips.

After the traumatic impact of the Covid-19 lockdown, the sector is now eagerly awaiting the opportunity to reopen for business on 15 July. While social distancing measures will put a limit on the scale of reopening, those who run tourism businesses are hoping it will enable them to generate at least some revenue, which could make the difference between survival and closure.

Many tourism businesses in Scotland and across the UK have seen a raft of support and assistance offered to them as a result of the effects of the pandemic. As 15 July approaches, they must now consider how their cash flow has been impacted, and is likely to be further affected by recent financial highs and lows.

They will need to determine whether they have suitable short-term cash reserves to pay employees and suppliers after the financial drain incurred since March, or whether borrowing is required. If this is the case, businesses must then decide if they are comfortable with the level of debt burden incurred and the impact this will have going forward.

The UK Government VAT deferral scheme, which enabled businesses to postpone three months of VAT payments to 30 June, has provided some help with cash flow. Those businesses which grasped this opportunity by cancelling their VAT direct debit for that period will now need to reinstate this or could risk running into VAT arrears going forward.

The industry is also set to benefit if the strong rumours of a reduction in VAT come to fruition. While not yet confirmed, there have been reports the Chancellor is considering reducing the standard rate from 20 to 17.5 or possibly 15 per cent later this summer which would be a welcome development in improving cash flow for businesses within the sector.

Tourism businesses provide a lot of jobs and many will need to consider employment issues in advance of the 15 July reopening. This includes determining when existing employees should be taken off furlough, or when new people need to be hired. Another important issue for tourism businesses is how they will ensure they are able to safeguard their employees’ health and follow new government health and safety guidelines.

The tourism sector also provides a living for a significant number of self-employed people, some of whom will not be able to return to work in mid-July. There is, however, support in place for these workers as the UK Government recently announced the extension of the Self-Employment Income Support Scheme (SEISS). Qualifying individuals can continue to apply for the first SEISS grant until 13 July and claim a taxable grant worth 80 per cent of their average monthly trading profits. This is paid out in a single instalment covering three month’s profits capped at £7,500 in total. Applications for a second grant will open in August, with qualifying individuals able to claim a further grant worth 70 per cent of their average monthly trading profits capped at £6,570 in total.

These government schemes have been essential in supporting the businesses and people driving the economic success of Scottish tourism. While this will be a hugely challenging year for many, the 15 July reopening of the sector is hugely welcomed and anticipated. It is essential that businesses are suitably prepared to make the most of this year’s limited trading window so they can survive the financial blow of the pandemic and build for the future.

Farmers and consumers need post-Brexit protection

The UK Agriculture Bill had its second reading in the House of Lords last week, with growing concerns raised about the lack of amendments to protect UK farmers and producers from lower quality imports in post-Brexit Britain.

The Bill will replace the EU subsidy system where an average of £2.88 billion was paid out annually to British farmers under the Common Agricultural Policy. While much of this new legislation will be relevant only to England, key measures including those on food security and fair dealing in the supply chain will apply here in Scotland.

The new Bill matters to everyone as it will shape the future of farming and food production across the UK and determine the quality standards available to consumers.

The volume of home-produced food consumed in the UK has fallen significantly in recent years, from 67 per cent in 1988 to around 53 per cent, increasing our reliance on imports. While such imports have been governed by high EU food standards, the Agriculture Bill currently contains no provision to safeguard future food safety, environmental, or animal welfare standards once the UK leaves the single market.

Opposition politicians and campaign groups such as Sustain, say this omission could force down the quality of food that is allowed to be sold in the UK as new trade deals are made with other countries, including the US, which do not share the same standards. Nearly 1 million people have signed a petition supported by the  NFUS which calls on the Westminster Government to amend the Bill to ensure imported foods will meet the same standards as those produced in the UK.

We are all aware of the much-publicised concerns about American chlorine-washed chicken and hormone-fed beef, but these could prove to be just the tip of the iceberg if a suitable food standards structure is not put into place for the UK following Brexit.

At a time when UK farmers are feeling the impact of Covid-19 and facing the growing prospect of a No Deal Brexit, the Scottish and UK Governments need to step up to support the industry and ensure consumers are protected.

Innovative measures to help farmers and food producers could include incentives to encourage shorter food chains, which would also support a green recovery. This will promote a higher level of buying and sourcing from local producers. With the Covid-19 pandemic exposing significant vulnerabilities to food supply chains, this will also help protect the high provenance level of Scotland’s food and drink offering.

Meanwhile the Scottish Government could review procurement regulation for public sector food contracts for schools and hospitals. This could allow a wide range of smaller suppliers, who lack the resources of some of their bigger competitors, to secure a foothold or greater share of this market while also ensuring high food quality standards.

Any gap in standards between UK produced foods and imports provides an additional opportunity for governments to support farmers by continued funding of a high profile ‘Buy Local’ campaign  highlighting  the high quality of home-grown produce. The NFUS proposed country of origin labelling programme, particularly within the catering and food processing industries, would also be a positive measure to reassure consumers.

The Agriculture Bill now goes to committee stage for more detailed examination and further discussion. Let’s hope suitable amendments will be taken on board that will improve the resilience of the UK’s food system and prioritise consumer safety.

The top 5 post-lockdown lessons for UK businesses from New Zealand

In his second blog on lessons learnt from New Zealand and moving forward from the COVID-19 lockdown, our newest Partner David Shadwell looks at what lessons UK businesses can learn from NZ and how to prepare in small steps to return to normal.

1. Develop a COVID-19 plan so your business operates safely

Under the current New Zealand level of lockdown, there are a variety of measures in please to keep workers safe, limit interactions with customers, and help prevent a second spike in cases of COVID-19.  Businesses must self-assess their ability to meet these restrictions and operate safely, just as they would normally to meet their duties under Health and Safety legislation.  However, the following guidance has been issued in NZ and UK businesses would be mindful to review:

  • Your business cannot operate if it requires close physical contact.  There are exceptions for some essential services, or in an emergency or critical situation.
  • Your staff should work from home if they can.
  • Customers cannot come onto your premises unless you are a supermarket, convenience store, petrol station, pharmacy or permitted health service.
  • Your business must be contactless.  Your customers can pay online, over the phone or in a contactless way.  Any deliveries or pick-ups must also be contactless.

Retail stores and hospitality businesses such as bars and cafes may operate, but customers cannot enter the premises.  Delivery, or drive-through or contactless pick up by customers is allowed.

Construction businesses can start work again but strict hygiene measures must be put in place.

As we can see from these NZ measures, the focus is on maintaining safe distancing, whilst still trying to carry out day to day tasks.  Think about your business, are there additional measures you can implement now in order to help your staff to prepare for a return to work – extra space between colleagues, any additional home working support, such as using a tax relief on home working, flagged up Chiene + Tait’s Hazel Gough.

 

2. Even with zero new cases, NZ is not out the woods

As of 4 May, New Zealand had gone 24 hours with no new cases of coronavirus.  This seems like a remarkable achievement, and something that could signal a rapid return to pre-COVID-19 ‘normal’ life.

However, Dr Ashley Bloomfield, Chief Executive of the New Zealand Ministry of Health, said NZ’s current lockdown rules need to remain in place for a time, despite the zero cases milestone. Infectious disease physician Dr Ayesha Verrall said the milestone is something to be “optimistic” about, but also a sign there’s still work to be done.

The indicator we should be looking at the most is locally acquired cases – contacts of a known case, and very rarely community transmission, Verrall said.  These are all new cases which are not imported from overseas, and therefore are transmitted among the community.  Even if we have zero locally acquired cases, the likelihood is we will continue to see new cases imported from overseas, she added.

Psychologist Dougal Sutherland commented that having zero cases will be a test for New Zealanders in “keeping the faith” and keeping to the rules.  There is a “danger of complacency” that comes with not having any new cases, as people may try and escape the boredom of being at home, thinking they are OK to do so, he said.  He urged people to remember that we were not out of the woods yet. It seems inevitable that restrictions in various forms will be with us for some time and success at phase 1 does not guarantee success further down the track.  Indeed, very similar messages have been shared by First Minister Nicola Sturgeon – if there is any risk of a second wave of cases that might overwhelm the NHS, the risk is too great and all citizens should take their own, and the safety others very seriously until infection and death rate figures allow us all to securely move forward.

 

3. Everyday life quarantine and summer don’t mix

The danger of complacency is real.  New Zealand recently enjoyed its first weekend at its current alert level, but unfortunately good weather and confusion over rules drew droves of people out of their bubbles.  In some areas, the hills and beaches got mobbed and local police had to move people along.  There was also wide-spread confusion that while responsible exercising was fine, it’s not ok to just hang out.  The police were alerted to 685 parties on Friday night in Christchurch alone.  This has led to enforcement actions taken against over 500 people.

With the milder temperatures of springtime in the UK, this means that winter is long forgotten and summer is around the corner.  This is unlikely to mix easily with a lifting of lockdown restrictions, whenever it happens.  Plus, with many people craving fresh air and warm sunshine in our normally cool Scottish landscape, the combination could provide a multitude of challenges for authorities.  South Korea has taken the precaution of publishing a 68-page guide to the dos and don’ts of “everyday life quarantine” in an attempt to reduce the risk of confusion.  I wonder if the Scottish Government will consider doing the same.

 

4. The pace of change has been turbocharged

The coronavirus pandemic has caused an astronomical acceleration in change to how we work. When people want to change, they can, and we’ve all been forced into a massive period of unprecedented change.  This includes the explosion of video conferencing, changes to schooling, the shift to online shopping and contactless delivery.  Similarly, millions have discovered a productivity boost gained from fewer social interruptions.  Going forward, there may be some real benefits from employing staff who can make those kinds of quantum leaps in how a business works.

The impact of technology was already being felt in changing business models and some jobs being replaced or transformed by automation, although the pace of technological change was largely static or slowing.  Technological change has a growing impact on disruption to the future of work, the workforce, labour markets, productivity and wellbeing. COVID-19 has turbocharged this change.  Some key components of technical change are recent improvements in the power and quality of artificial intelligence (AI), the spread of robotics, and the emergence of digital platforms as ways to seek and organise work.  This may no longer be the case.  There have been several recent breakthroughs in AI.  For example:

  • British AI company DeepMind announced in 2018 that it had developed a healthcare algorithm that could detect over 50 eye diseases as accurately as a doctor (Vincent, 2018);
  • An AI system has achieved 95% accuracy in reading lips, considerably outperforming human lip readers (who were only right 52% of the time) (Manyika et al., 2017);
  • An IBM programme took part in a live debate with humans in 2018 in “what was described as a ground-breaking display of artificial intelligence” (D. Lee, 2018); and
  • Image recognition software now exceeds human accuracy levels (Shoham et al., 2018).

The fear is that technology is replacing cognition.  This will leave people with no comparative advantages and no work to do.  Perhaps, though, the rise of technology makes skills like communication, leadership, and cultural intelligence more important than ever.  Businesses that recognise and place more value on staff with an active growth mindset, curiosity and a willingness to learn, may be better placed to adapt to this new pace of technical change.  Charles Darwin noted that survival is not based on being the strongest or even the most intelligent, but the most adaptable.  The UK’s future prosperity will depend on how well it is able to adopt technology.  Rather than treat technology as a threat, we need to remove barriers to businesses adopting technology, and assist our people to gain the most from innovation and adapt effectively to change. The businesses that will do well will be those that are adaptable and resilient in the face of this significant change.

 

5. You won’t get much notice

In a televised address to the nation on March 23, Prime Minister Boris Johnson announced unprecedented limits on where and how people can meet and gather during the continuing coronavirus.  The lockdown officially started the next day.  He is due to announce on Sunday May 10th how some of the measures may be rolled back, possibly from Monday 11th May.

This trend of changes being announced with minimal notice might continue.  New Zealand Prime Minister, Jacinda Ardern, said New Zealand will likely have two days’ notice before entering a different COVID-19 alert level from the current position.

So, as we wait for information on when the UK’s next phase might kick in, and what its staggered approach might look like, businesses should prepare as best they can now.

Businesses are likely to be required to encourage home-working and stagger shift times to prevent buses and trains being overwhelmed.  Staggered shift times should also improve social distancing inside offices, where employers must keep staff two metres apart.  It may be necessary to use floor tape to set out appropriate spacing.  Protective screens and equipment may be required where keeping the two-metre gap is not possible.  Additionally, providing more parking spaces may be necessary to avoid employees sharing cars.

 

Just as New Zealand businesses must self-assess their ability to meet the restrictions and operate safely, employers in the UK should expect to implement a coronavirus risk assessment before allowing staff back in the office. Even with Government-issued guidelines, every business and every employer will need to make some judgement calls, and these can be taken now, so you are as prepared as possible when science suggests the pendulum can start to swing back to ‘normal’.

Does New Zealand provide the UK with post-lockdown hope?

In his first blog, David Shadwell (who recently moved from New Zealand to join Chiene + Tait as our newest Partner) considers how the UK can learn from the NZ approach to removing the lockdown and how we can take some confidence that there is a light at the end of the current COVID-19 tunnel.

 

I’ve just recently returned to the UK, taking up a new role in Edinburgh after living and working as an adviser in New Zealand. The nation, which was my home for nearly a decade, is now providing useful insights into how both individuals and businesses here in the UK might eventually emerge from Covid-19 restrictions.

New Zealand imposed stringent lockdown measures from the end of March, a strategy which seems to have worked as they’ve experienced under 1500 confirmed cases and just 20 deaths from Covid-19. In a similar tone to the UK Government, New Zealand Prime Minister Jacinda Ardern has led a cautious programme with a phased lifting of restrictions to reduce the risk of a further outbreak of the pandemic.

New Zealand moved to what is called Alert Level 3 at the end of April, where it will remain until this week when Ms Arden and her cabinet will review its impact, and make further decisions on whether to introduce a further easing of restrictions.

Alert Level 3 requires people to remain within their homes when theyare not at work or school, except when food shopping or exercising. Existing households in self-isolation can, however, be expanded to include other select family members outside of the home, with social distancing measures remaining in place. Isolated and more vulnerable individuals can also get access to carers and other forms of support.

Alert Level 3 allows New Zealanders who were forced to lockdown while away from their families, to now return to live with them but people must remain within their local area, except while travelling to their place of work or school, assuming they’re unable to work or learn from home. Meanwhile recreation restrictions have been eased, but there is still a strong emphasis on local, low-risk activities and exercising either by yourself or with people within your current household.

Unlike the UK, New Zealand schools, nurseries and education centres are now open for children up to and including year 10, with appropriate public health measures put in place, where distance learning is not possible. Young people in the final two years of high school are, however, continuing to learn at home. Under Alert Level 3, New Zealand schools have significantly fewer students on their grounds, with those in attendance required to maintain physical distancing as much as possible. PPE is not mandatory within schools, but any pupil or teacher with health concerns has been ordered to stay at home. Tertiary education continues to be provided online.

Despite the incremental nature of these changes, early signs show a modest return towards normality for New Zealanders. Analysis on 28 April, when Alert Level 3 began, showed traffic volumes increasing by an estimated five percent in Auckland, Tauranga and Hamilton, and by nearly 15% in Wellington compared with the previous week. This suggests more people are returning to their place to work albeit at different speeds across sectors and regions. Encouragingly, there are now more job listings online and more people viewing them. Google mobility data also showed New Zealanders got through five times as many takeaways in the first week of restrictions being eased with McDonalds doubling their average daily burger sales.

While the UK has a long way to go in its own post-pandemic journey, we can take some confidence from what’s happening in New Zealand and the potential to experience a modest yet welcome economic uplift as lockdown restrictions are slowly but steadily lifted.

Leap year – an opportunity to jump ahead on life admin

In this blog, Keith Brown in our Accounts and Business Support Team advises what you should do with the extra leap day this year and get ahead of life admin.

Leap years are special. As a day that only happens once every 4 years, 29 February always feels like bonus time; all the more so as it’s a Saturday this year.

So what to do with all this spare time?

Allow me to make some suggestions. After 31 March, 31 December is the most popular year end for companies. If this is the case for you, why not pull together your accounting records and send them in? This will mean you get plenty of time to plan for any tax which is due before you need to pay it, at the end of September.

Alternatively, if you don’t have a December year end, you could take this opportunity to review your processes and business. Our Accounts and Business Support Team utilise various projection and forecasting software packages, as well as having experience of different automating software to make it easier for you to record expenses on the go. So why not drop us an email or give us a call and see if there’s a way we could make life easier for you?

From a personal perspective, it’s not to late to get some tax planning done before the tax year ends on 5 April. Budget day is approaching and with rumours of changes to certain tax reliefs. This may be your last chance to take advantage of some of these, so scheduling a meeting with someone from our Personal Tax Team will be beneficial.

Life is getting busier for all of us, so it seems to me that an ideal way to use this additional bonus time would be to get things in motion to try to counter any last-minute stresses. From a business perspective, Chiene + Tait is ideally placed to help.

Business must prepare for R&D tax relief crackdown

In this blog, Dave Philp Head of R&D at Chiene + Tait outlines the implications of a potential clampdown on spurious research and development claims to HMRC.

R&D (Research and Development) Tax Relief, introduced in 2000 to encourage more company investment into innovation, is more popular than ever. In 2017-18, UK companies submitted over 48,000 claims for R&D tax credits. A total of £4.3bn in tax relief was secured, an increase of £1bn from the previous year. Here in Scotland, £175m in R&D tax relief was secured by businesses in 2017-18. While this rise in claims is positive, suggesting more UK businesses are focusing on innovation as a way to make themselves competitive, there are also concerns about illegitimate claims being submitted.

HMRC is now taking steps to combat fraudulent claims, reporting that it has already identified and prevented half a billion pounds of fraud linked to R&D tax credits. Last year the Government announced it would re-introduce the PAYE and NIC cap on SME payable credits, a move aimed at preventing fraud within structures set up to claim a tax credit despite there being no evidence of UK-based innovation activity or job creation.

Following the internal re-structuring of HMRC’s R&D tax teams last Autumn, it was also announced in the Queen’s speech that the Government would create a single, beefed-up, anti-tax evasion unit to cover all taxes and introduce new anti-avoidance measures. This potential forthcoming clampdown on R&D tax credit abuse in the UK follows a similar process carried out in Australia in 2018 which sent shockwaves through that country’s software sector. The Australian Government’s crackdown had significant impact with companies, including the tech firm Airtasker, being ordered to pay back millions of dollars they had received in R&D tax breaks.

While a number of businesses there were caught on the hop, the Australian Tax Office had made clear a year earlier of their intention to review R&D claims from software companies. This came amid concerns that advisory firms were encouraging companies to claim for work, which didn’t count as pure R&D. Despite the British Government getting set to impose greater scrutiny here, its support for R&D tax credits is unlikely to dissipate, especially with the UK having just completed its withdrawal of the EU.

Indeed, the new Boris Johnson-led administration has stated that it will review the definition of R&D, mainly to further incentivise cloud computing and data projects. It has also announced it will increase the R&D Expenditure Credit available for large companies and grant-funded projects. Potential abuse of R&D tax relief claims is, however, likely to be subject to much closer scrutiny going forward. To assist this process, one of the areas that the Government should be focused on is tougher regulation for those who advise companies on R&D tax relief.

Whilst there are a number of good, tax focused, R&D advisors operating within the UK, there are also a number of ‘experts’ who resort to cold-calling and wrongly advising that a company can easily qualify for relief. HMRC can take their time opening enquiries into a company’s tax affairs and any erroneous claim will be required to be repaid, along with potential penalties and interest. It will also likely be a red mark in any due diligence process, should it wish to be sold in future.

While other business advisory professionals, such as accountants and lawyers, must rightly conform to regulation and governance from their respective industry bodies, there is currently no such body to regulate R&D specialists. New regulation in this area would help to ensure companies are not put in risk at making an illegitimate claim.

Time will tell if the UK’s R&D tax credit crackdown will prove to be as harsh as what occurred in Australia.  There is, however, no doubt that companies need to consider whether they meet HMRC’s definitions as set out in the tax legislation and guidance with sufficient back up to support their claim. For those companies that are unsure of this process it is important they work with a credible and established adviser, ideally one that is currently governed by an industry code of conduct.

EIS: The Current Landscape and Future Trends

The Enterprise Investment Scheme (EIS) has seen a lot of changes in recent years with the main focus of concentrating the scheme on high-growth companies, thereby re-positioning the market towards greater risk. The move from capital preservation to more organic high-growth companies has been driven by the new risk to capital condition. This has seen investment lean heavily towards the technology sector, whereas previously more investments were made in the infrastructure sector, which is traditionally more asset-backed, and the media and entertainment industry, using special purpose vehicles.

Although these changes may be realigning EIS with that of its intended purpose (focused on high-growth companies), their overall impact and therefore the number of businesses supported may be difficult to realise with the ever-looming issue of Brexit. Furthermore, it is expected that the changes will result in a drop in the number EIS investments made, however, we will need to wait until Spring 2020 when HMRC publishes its annual statistics for these effects to be quantified.

In summary, the volume of EIS investments completed has been steadily increasing for several years, and the figures published for the 2017/18 tax year show no divergence from this trend. As mentioned previously, these results are expected to drop significantly in response to the introduction of the risk to capital condition introduced last year.

EIS Investments HMRC 2019
Source: Alternative Investment Report 19/20: Enterprise Investment Scheme – Industry Report (Intelligent Partnership)

 

Although EIS is a hugely lucrative and popular scheme, there still seems to be an abnormally low level of utilisation in Scotland. Of the 3,920 EIS investments made in 2017/18, only 185 (5%) of them were made in Scottish companies, and a large number of the investments were in London based companies (1,860).[1]

The knowledge-intensive companies rules have seen several changes since their introduction in the 2015 Finance Act, the most recent of which sees the annual investment limits doubled to £2m and

10m for individuals and companies, respectively. HMRC have also been granted powers to approve knowledge-intensive funds, which should increase their use in the industry.[1]

HMRC’s Advance Assurance application process has also seen significant changes recently with the rejection of speculative applications and the introduction of a compulsory checklist. The change in HMRC’s position towards speculative applications (i.e. now refusing to consider them) has seen a reduction in the number of applications submitted, this is thought to have been done to ease the load on HMRC. However, it has caused some frustration in the industry, as investment opportunities were previously assessed by investors after Advance Assurance had been acquired. The figures also show that the percentage of submitted applications being accepted has dropped significantly, this may be in response to the new risk to capital condition that gives HMRC inspectors added discretion when it comes to accepting or rejecting applications.

ASA requests
Source: Alternative Investment Report 19/20: Enterprise Investment Scheme – Industry Report (Intelligent Partnership)

It seems as though the Government is attempting to direct EIS investment back towards high-growth, entrepreneurial companies and that can only be good for the economy. Although the investors in the market may be frustrated by these changes, it is unlikely that the level of investment made using EIS will change substantially due to how rewarding the scheme is in terms of tax breaks. With Brexit looming on the horizon, EIS may be subject to further changes as the EU state aid rules will no longer be enforced.[1] This may free the UK Governments hand to determine how they wish the tax relief to be structured.

As the EIS legislation becomes increasingly complex, and HMRC flex their muscles regarding the risk to capital condition, the need for experienced EIS advisors continues to grow. If you have a query about EIS investment or generally investing in a company, please contact Ryan today at ryan.lewis@chiene.co.uk.