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.

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.

How (a background in) sport has helped me settle in at C+T

Playing sports has always played a huge role in my life, filling the majority of free time I have. I feel the experiences I have encountered through playing sport have allowed me to begin developing the skills necessary to be successful in my professional career. However, in order to develop my skills further, I needed real exposure to a professional environment which is where C+T comes in.

Going back to this time last year, summer 2018, I was about to take on one of the most exciting challenges, one that on paper seems very different to the challenge here at C+T, but surprisingly had many similarities.

Setting off on my own on the 18,000km+ journey to Christchurch, New Zealand to play rugby with one of the country’s most prestigious teams is something I had previously only dreamed of. The complete unknown loomed from my first step on NZ soil. Everything was new to me; the people, the culture and the environment in general were a huge change – the term ‘thrown into the deep end’ springs to mind!

You might be wondering what this has to do with an Entrepreneurial Tax Internship in Edinburgh? The feelings I faced on day 1 here at C+T were similar, albeit I wasn’t throwing myself around the office (most of the time). Entering a new, professional environment comes with the same feelings of uncertainty, which I have come to realise must be cherished and taken full advantage of. The opportunity to do something new and different allows you to develop and grow as an individual, both in the office, on the field and in life generally.

After somewhat settling into life here as an intern I have been exposed to a vast variety of taxes, tax reliefs and tax procedures from CGT to EMIs to completing corporation tax provisions. I cannot speak highly enough of the patience and understanding I have had from everyone thus far; I assume that an intern asking questions every five minutes can be a bit irritating (to say the least!), but if you don’t ask, how do you ever learn?

I have thoroughly enjoyed being exposed to the R&D team at C+T, learning about legislation regarding tax relief has allowed me to understand the substantial impact that correct R&D advice can have on a business. Listening in on calls and seeing first-hand the interactions between clients showcased the friendly, but professional manner that C+T hold themselves to. Working with the R&D department, I got the chance to learn and understand the new and unique technological advancements each client makes, something I found to be a fascinating!

One final thing that stands out for me about C+T are the people. They say the people make the firm and I believe that to be true here at C+T. Like the Kiwis, I received a warm welcome, they really made me feel like part of the team from day 1, showing me that C+T put an emphasis on developing relationships both internally and externally.

Overall, I am looking forward to furthering my knowledge and developing my skills in my final two weeks at C+T and I am excited for any future challenges that may arise both in the office and the field.

New blog: my time working in the Entrepreneurial Tax Team

Mid-way through my third year at university, summer internships seemed to be on everyone’s mind. Most people I knew were talking about the roles that they had applied for and how important internships were for putting you in a good starting position post-university. Doing an internship seemed like a great idea, it would provide me with an interesting way to fill my 3-month summer break, learn more about the working world and develop new skills. Having enjoyed the brief two weeks of work experience I had done with Chiene + Tait the previous summer, an internship with the entrepreneurial tax team seemed like the ideal opportunity.  I applied and was thrilled when I was offered an interview and even more thrilled when I was offered a six-week position with the firm.

Going from university to working at Chiene + Tait took some adjustment. I’m currently studying Economics and Modern History and I thought when I first joined the firm that studying these subjects would be vastly different to working in an accountancy firm. At university I only have around six contact hours a week  (I’m sure the English and international students must wonder what they’re paying for a lot of the time) and, although the lack of teaching time does mean a significant amount of independent study and long days spent in the library, it is often quite an unstructured working environment. Joining the firm this summer has given me an insight into what my working life could be like. I have also found that although some of the knowledge I have gained from university may not always be useful (or who knows maybe one day that modern history essay on the cultural impact of the miniskirt will come in handy), the skills I have gained often are.

‘So, what actually is entrepreneurial tax?’ A question I have been asked many times by my friends and family since starting my internship at Chiene + Tait this summer, and one that I struggled to fully answer at first. Over the past three weeks I have quickly learned what a job in entrepreneurial tax entails (although from writing this blog I’m beginning to realise that I may never learn how to spell entrepreneurial), and I have seen the great work that Chiene + Tait does for growing businesses. Throughout my time here I’ve been assigned interesting and engaging work to do with the various schemes available to companies and investors. From Enterprise Management Incentives (EMI) to Enterprise Investment Schemes (EIS) and Research & Development Tax Credits the variety of work I have been assigned has been challenging but also enjoyable. It has shown me just how many fascinating companies the firm deals with.  I’ve even attempted some Corporate Tax which I think I might be finally wrapping my head around. In just three weeks my knowledge of Entrepreneurial Tax and other types of tax has grown substantially, and I can now provide a more detailed answer when people ask me what entrepreneurial tax is.

The work and type of clients have been very interesting but above all, being made to feel part of such a friendly team has made the whole experience very enjoyable.

Understanding Investment

In this blog, Kirsty in the Chiene + Tait Entrepreneurial Tax Team outlines the different types of investment available to entrepreneurs and how to access funds.

What is investment?

Investment is a two-way funding street – an investor will fund a business idea in order to help an entrepreneur on their journey in the hope that there is a return on their investment. An entrepreneur looks for investment to receive a cash injection to take their idea to the next level. Different companies have different requirements in order to develop an idea or scale up, and investors have varying appetites and interests.

It’s important to remember that giving or receiving an investment is a financial transaction and therefore there are rules, but also helpful reliefs (see our useful links below) available to make the most of funds.

The main types of investment we come across at Chiene + Tait are:

  • Equity – an investor provides funding for the company in exchange for equity in that company.
  • Debt – an investor loans money to a company, generating a return through interest on the loan alongside repayment.
  • Convertible debt – is simply a loan that can be turned into equity (share ownership), generally upon the occurrence of future financing.

Entrepreneurs can be easily bamboozled by different investment types and what they need to do after receiving funds – keep in mind that very little is given philanthropically i.e. for free, and you will need to give something in return.

 

Availability of funding?

More often than not the entrepreneurs I speak to see cash flow as one of the biggest barriers to growth, accessing funds to grow is an essential component of any start up or scale up. Apart from individual investors, there are other sources of investment funding available to start ups:

  • Incubators – this is a ready to go to space that has support and infrastructure available for start ups. Entrepreneurs should keep in mind that the incubator is itself an entrepreneurial venture; investors often pool funds to secure a large building and outfit the space with its own support team and everything needed for dozens of start-ups to engage in business. The incubator generates revenue by charging monthly rental-access fees to the tenant companies.
  • Angel Syndicates – this is where a number of investors pool their investment resources in order to have a greater pot available to invest in entrepreneurs. In order to access funds from syndicates, entrepreneurs usually have to attend syndicate board meetings and pitch for funds.
  • Scottish Investment Bank (SIB) – this bank was specifically created to increase the supply of finance to SMEs in Scotland. Grants and funding are available via SIB and Scottish Enterprise to support growth. The new Scottish National Investment Bank (SNIB), which will be completely distinct from SIB, was announced by the Scottish Government in September 2017 and will also provide new sources of funding for SMEs. The SNIB is currently the subject of a public consultation with further detail expected in the coming months.
  • Venture Capitalist (VC) – is a corporate investor who provides funds to, usually, later stage startups or scale ups.

 

Process

The process for getting funding varies, depending on the source of funding. A typical investment deal will go something like this:

  • Writing a business plan to use as a tool to outline your idea and demonstrate to investors how their funds will be used,
  • Pitching your company or business idea in order to get investors on board,
  • An initial offer is made using a term sheet, setting out expectations and valuation,
  • An investment agreement is drafted by the lawyers which may be subject to some negotiation,
  • The agreement reaches completion and the funds are transferred.

 

Top tips

So, you’ve got a plan of action and a set objective to achieve growth. But what tips can I give you from my experience to help you on this journey?

  • Practice your pitch – don’t go into a meeting with an investor without having a thorough understanding of your plan, the investment you are looking for and your exit strategy.
  • Assess the correct funding for your company – understand what investment type suits your current and future needs.
  • Sector specific investment – assess whether there is an investor or syndicate that specialise in your field, rather than approach a bank or general funder who may not be able to provide additional mentoring and key expertise.
  • Plan your timings – don’t think that everyone will want to throw money at your brilliant idea. At any one time there are hundreds of other brilliant ideas that investors are looking at. It takes a lot of time to fundraise.
  • Understand your costs – be realistic with your costs, an investor will want to see that you’ve thought through your plan carefully and fully. Any investment will be in you, in addition to your business idea and an investor will want to be confident that you can deliver the goods within your projected budget.

 

If you have any queries about understanding investment, feel free to drop me a line at kirsty.paton@chiene.co.uk or call 0131 558 5800. Alternatively, I’ll be at the Investing Women Ambition & Growth Conference 2018 running 1-2-1s and masterclasses. See you there!

Dave Philp in our Entrepreneurial Tax Team has also written a blog for startups called Are you missing out on Research & Development Tax Relief. To read this blog, watch his accompanying webinar or download his related infographic click here.

Are you missing out on Research & Development Tax Relief?

In this blog, David in the Chiene + Tait Entrepreneurial Tax Team highlights Research & Development Tax Relief and asks – are you missing out?

Scottish companies received over £165 million in Research & Development (R&D) tax credits last year. Yet a recent HMRC study showed a number of industries are still failing to claim R&D tax relief, when they could be eligible. I’ve produced an infographic on which sectors can claim the relief but traditionally don’t here.

There is a misconception that the relief is only available for technology start-ups or scientists in lab coats. This is just simply not the case, so is your company missing out?

What is Research & Development Tax Relief?

Research & Development tax relief is one of the most generous corporation tax relief currently available. The relief is a HMRC incentive designed to encourage innovation and increase spending on R&D activities, however, many companies incorrectly believe that they don’t qualify.

The relief can be extremely beneficial. Under the scheme companies can receive a tax credit or enhanced deductions to reduce their tax bill, that means £100k worth of qualifying expenditure can get you either:

  • £230k worth of losses (worth £44k @ 19% tax rate) to utilise against future profits or
  • £33.35k tax credit (cash in hand)

Essentially this means that if your company has tax to pay, you will pay less. If not, the Company will receive a tax credit.

What is R&D?

In the eyes of HMRC, R&D is a project that seeks an advance in science or technology through the resolution of scientific or technological uncertainties.

An advance in science or technology is an advance in the overall knowledge or capability in a field of science or technology (not a company’s own state of knowledge or capability alone). This can also include a project that seeks to make an appreciable improvement to an existing process. In layman’s terms, if you are seeking to create something new or improve upon an existing process, it will likely qualify for the relief.

Even if the advance in science or technology sought by the project is not achieved, R&D still takes place. This means that costs relating to aborting a project could also qualify for R&D.

Available for all – not just people in lab coats

With such a broad definition, thousands of companies are missing out. Below are just a few examples of projects that have qualified for relief in the last year:

  • Creating a new recipe for a soft drink to adhere to the new sugar content regulations
  • Improving upon an existing manufacturing process
  • Creating a bespoke multi-functional piece of furniture
  • Building a software infrastructure that’s more efficient than its competitors
  • Developing an in-house Customer Relationship Management system

None of these are ’traditional’ R&D projects but all qualified for R&D tax relief. Some tips to keep in mind when considering if your project will qualify is to ask yourself the following:

  • Has a technological advancement been made?
  • Is the company working on something that has never before been attempted?
  • Has the company tried to improve their existing products through technological change?
  • Has the company found a more efficient way to work?

If your answer is yes to any of these then there will likely be scope for an R&D claim. Your next step should be to speak to an R&D specialist to determine the size of the claim and to ensure that you don’t suffer any pitfalls!

Chiene + Tait has a specialist R&D team that can help identify what can and cannot qualify for relief. In the past 24 months, we have successfully submitted over 80 R&D tax credit claims resulting in over £2.5 million being received by our clients, achieving a 100% success rate. If you would like to watch a webinar outlining these points, please visit the Chiene + Tait You Tube channel here.

If you would like a no obligation meeting to discuss R&D Tax Relief and whether you can apply, please contact me at david.philp@chiene.co.uk or call 0131 558 5800. Alternatively, I’ll be at the Investing Women Ambition & Growth Conference on 8th March and happy to chat further.

Kirsty Paton in our Entrepreneurial Tax Team has also written a blog about Understanding Investment. To read this article click here.

Grants v R&D tax credits – How to have your cake and eat it too!

In this blog David Philp in our Entrepreneurial Tax Team highlights how receiving grants can restrict a company’s ability to claim other tax reliefs such as R&D tax credits.

 

Grants form a vital part in the startup lifecycle, providing critical financial support to innovative companies. They give companies cash at a time when they are unlikely to have profits or even an income stream. The cash can be used to invest in further development, or to just keep the lights on for another couple of months.

However, as the saying goes “you don’t get anything for free” – receiving a grant could restrict the company’s ability to claim further tax reliefs and incentives.

Research & Development (R&D) Tax Relief (further info can be found here) is one of the most generous corporation tax breaks available, designed to encourage innovation and increase spending on R&D activities. It provides vital funds to startups in the early years of their development. There are two R&D schemes that run in parallel: the SME scheme and the RDEC scheme.

To qualify for the SME scheme, the company must have fewer than 500 employees and either have an annual turnover of less than €100m or gross assets of less than €86m. The SME scheme is by far the more beneficial out of the two available. For every £1 the company spends on qualifying R&D costs, the company can receive 33.35p in tax credits. This is a significantly higher level of relief than the level available under the RDEC scheme, which provides an 8.8p (which for expenditure after 31/3/17, increases to a whopping 8.9p) tax credit for every £1 spent on qualifying R&D costs (there are also further restrictions on what expenditure qualifies under the RDEC scheme).

The main issue that arises is that, as the SME scheme is so advantageous, the relief itself is deemed to be Notified State Aid. A Notified State Aid is one where the European Commission has been notified of the grant’s existence. In a bid to guarantee a level playing field for European businesses, the European Commission restricts Notified State Aids to one per project. That means if the company has already received Notified State Aid for a project, that project will not qualify under the SME scheme.

Unfortunately, it is not possible to repay the Notified State Aid. Once received, the project is automatically excluded from claiming R&D tax relief under the SME scheme.

This can have a disastrous effect to the availability of future relief for the company, which is best shown by the example below. Let’s assume that a loss-making fintech company (SME) is developing a single R&D project, spending £250,000 on R&D-qualifying staff costs and £70,000 on costs which were subcontracted to another company. To help with cashflow they also applied for a grant of £40,000.

Option A Option B
No Grant Received £40,000 Notified State Aid Received
Loss Making
SME RDEC
Qualifying Costs
Staff costs 250,000 250,000
Subcontractor costs (SME – restricted to 65%, RDEC Scheme – ineligble) 45,000 0
Less: Grant received (ineligible under SME Scheme, instead eligible under the RDEC scheme) 0 0
Qualifying costs under the SME scheme 295,500 0
Qualifying costs under the RDEC scheme 0 250,000
Tax Relief
SME scheme – tax credit worth 33.35% of qualifying costs 98,549 0
RDEC scheme – tax credit worth 8.8% of qualifying costs (subject to restrictions) 0 22,000
Grant received 0 40,000
                                                                                                        
Total relief (R&D and Grant) 98,549 62,000

 

You can see that, if the grant was Notified State Aid, it would significantly restrict the total relief available to the company. In this instance, the company would have been in a better position had it not taken the “free money”. This also restricts relief for future periods. Therefore, it is imperative to consider all your options before accepting cash in a form of a grant.

There are, however, a couple of things that you can do to avoid any potential pitfalls. By following the tips below it is possible to maximise your claim by combining both grants and R&D tax relief:

Know what type of grant your applying for – firstly, not all grants are classed as Notified State Aid and, as such, not all grants will land you in the less advantageous RDEC scheme. De-Minimis aid, which can distribute up to €200,000 worth of funding, is not classed as Notified State Aid and will therefore not force the project into the RDEC scheme. In this instance, it is possible to split relief over the two schemes: subsidised expenditure would fall under the RDEC scheme while the remaining unfunded expenditure will remain qualifying under the SME scheme, as seen in Option C below.

 

Option A Option B Option C
No Grant Received £40,000 Notified State Aid Received £40,000 De-Minimis Aid Received
Loss making
SME RDEC SME/ RDEC
Qualifying Costs
Staff Costs 250,000 250,000 250,000
Subcontractor costs (SME – restricted to 65%, RDEC Scheme – ineligible 45,500 0 45,500
Less: Grant received (ineligble under SME Scheme, instead eligible under the RDEC scheme)                              0                                                      0                                          -40,000
Qualifying costs under the SME scheme 295,500 0 255,500
Qualifying costs under the RDEC scheme 0 250,000 40,000
Tax Relief
SME scheme – tax credit worth 33.35% of qualifying costs 98,549 0 85,209
RDEC scheme – tax credit worth 8.8% of qualifying costs (subject to restrictions) 0 22,000 3,520
Grant received 0 40,000 40,000
                                                                                                                                                  
Total relief (R&D and Grant) 98,549 62,000 128,729

 

Determine what project the grant relates to – the rules apply on a project by project basis, not on the total R&D work undertaken in the year. If you have received Notified State Aid in relation to one project, this does not affect your ability to claim under the SME scheme for any remaining projects. Likewise, if you have received Notified State Aid in relation to non-R&D activities, this will not affect your SME claim.

Look at the long-term implications – remember, once you have received Notified State Aid in relation to a project, that’s it: there is no way back. Try to consider the long-term implication of receiving the grant and how it will affect future claims. Taking a small £10,000 grant at the early stages of a R&D project may help cashflow in the short term, however this could also affect the ability to claim R&D tax relief in future years.

Speak to people who know R&D tax relief – I might be slightly biased here but R&D tax relief is an ever-changing, complex area of legislation and it really does pay to speak to an expert to ensure that you are maximising your claim, whilst also planning ahead to avoid any potential pitfalls.  A quick chat at the beginning of a project can provide you with a clear and proactive action plan, leaving you with more time to run your business!

If you have any queries about R&D tax relief, Notified State Aid or De-Minimis State Aid related to investment, contact David Philp today at entrepreneur@chiene.co.uk.