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EIS & SEIS

If you are a director of a company seeking to raise finance, or if you are interested in investing in shares, you should consider the valuable tax relief available under the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).

EIS and SEIS were introduced to encourage individuals to invest in smaller, high-risk companies. They offer generous income tax and capital gains tax benefits, namely:

Income Tax

  • EIS Shares – a reduction of income tax of up to 30% of the lower of the amount subscribed or £1mllion (i.e. maximum relief of £300,000.
  • SEIS Shares – a reduction of income tax of up to 50% of the lower of the amount subscribed and £100,000 (i.e. maximum relief of £50,000).

Capital Gains Tax

  • No capital gains tax on the sale of EIS & SEIS shares, provided that the investor owned the shares for at least 3 years prior to sale and income tax relief was claimed.
  • EIS reinvestment relief, which allows an individual to defer the capital gains on sales of other assets if they reinvest the proceeds in qualifying EIS shares.
  • SEIS reinvestment relief, which allows an individual to exempt a portion the capital gains on sales of other assets if they reinvest the proceeds in qualifying SEIS shares.

EIS & SEIS: What’s the difference?

EIS and SEIS are both aimed towards unquoted companies looking to seek investment to further their trade.

The conditions for qualifying for EIS and SEIS are broadly similar, however as SEIS focuses on high-risk early-stage companies, the rules are more restrictive.  A brief summary of some of the conditions that must be met include:

EIS SEIS
Must not be carrying on certain prohibited or excluded trades (e.g. legal and accountancy, farming, property development). Same as EIS
Must be an unquoted company Same as EIS
Must not be controlled by another company Same as EIS
The assets of the company must not exceed £15 million before the share issue, and £16 million after the issue The assets of the company must not exceed £200,000 before the share issue
Must have fewer than 250 full-time employees (or 500 for knowledge intensive companies) Must have fewer than 25 full-time employees
The funds raised from the share issue must be spent on a qualifying business activity within 2 years of issue/commencement. Same as EIS, except the deadline for spending the funds raised is extended to 3 years.

 

Share issue must take place within 7 years of the first commercial sale made by the company (10 for knowledge intensive companies) The business activity carried on by the company must not be more than 2 years old.
Shares must be ordinary shares which do not carry preferential rights Same as EIS

How can we help?

There are strict conditions that apply to the company, the shares, and the investor(s) that must be met in order for EIS/SEIS to apply. We have assisted our clients by performing a detailed review of the rules and advising on whether they could qualify under EIS/SEIS.

Businesses looking to utilise EIS/SEIS for their company must send certain forms and information to HMRC to allow HMRC to certify that the company shares qualify for tax relief. We can help prepare the appropriate documents to put forward the best case for why a company will be eligible.

HMRC also offers advance assurance so that directors and investors can be certain that the company’s shares will qualify for EIS/SEIS before they are issued. We can also prepare these advance assurance claims to provide further comfort for clients.

EIS and SEIS investments carry financial risk and should only be undertaken after speaking with a qualified financial advisor.

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VAT

VAT is a key consideration for businesses, as the payment and refund of VAT can have a significant impact on cash flow and funds available.

Some key VAT issues that we can advise on include:

  • Whether goods and/or services are a “taxable supply”
  • Land and property & Option to tax
  • Group companies
  • Transfer of business
  • Registration and deregistration
  • Flat-Rate Scheme
  • Capital goods scheme
  • International VAT issues

We can assist with VAT-specific queries but will also consider the VAT implications of any transaction as part of our holistic tax advisory service.

The Problem

A pub was purchased, which also contained a modest residential flat. VAT on the acquisition was apportioned as follows: 90% standard rate VAT (applying to the commercial aspect of the property used as a pub), and 10% VAT exempt (relating to the residential part of the property).

Following a substantial refurbishment of the property, the owner wanted to confirm:

  1. the VAT that was reclaimable on the refurbishment costs, and;
  2. given that the refurbishment mainly related to the commercial aspect of the property, whether this would affect the commercial/residential VAT apportionment going forward.

The Solution

The refurbishment costs were analysed to determine which costs related to: the commercial part of the property; the residential part of the property; and to both parts of the property together. Following this, we consulted the partial exemption rules for VAT, and the ‘de minimis’ rule, to determine how these applied.

We investigated the apportionment of VAT, considering the industry standard for pubs (90:10), relevant case law concerning the VAT apportionment on pubs, and the general rules on apportioning VAT, to obtain a full understanding of the matter.

The Result 

The level of refurbishment costs that related to the commercial and residential parts of the property respectively, was found to satisfy the partial exemption rules and ‘de minimis’ test. As a result, 100% of the input VAT on the refurbishment was found to be reclaimable.

It was also found that the industry standard of 90:10 should continue to apply and remain unchallenged despite the significant refurbishment costs to the commercial part of the property. It should be noted that where an alternative VAT split may be more appropriate, circumstances should be considered in the round, with weight given to all relevant factors e.g. floor space, usage, potential usage etc.

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Valuations

There are many situations when a company valuation may be required, such as:

  • A sale of a shareholding
  • Setting up an employee share scheme
  • Earn-outs
  • Shareholder disputes
  • Meeting the terms of a shareholders’ agreement
  • Matrimonial disputes
  • Shareholder protection insurance
  • For inheritance tax purposes
  • Gifts into a trust 
  • A gift of shares requiring holdover relief

PD Tax are experienced in providing valuations of businesses. Taking into account the purpose of the valuation and your company’s specific circumstances, we will consider the most appropriate method of valuation and prepare a full and independent report. Where required, we can also assist in the negotiation process or help you develop your exit strategy .

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Succession Planning

If you are considering retiring from your business, then careful structuring of your succession (whether to family members, key staff, or outside investors) is vital to mitigating the tax paid on your exit.

If you are planning on selling your company  then tax advice can help ensure you make the most of all available tax reliefs for the sales of businesses.

If there is no willing purchaser then the company may opt to purchase the shares directly from the shareholder.

We have considerable experience in assisting clients plan for their retirement by devising the most suitable strategy to meet their needs.

Following your exit from the business, we can help determine whether you will need to report the gain on your Self Assessment tax return, and if so, assist with the preparation and filing of all the necessary paperwork.

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Share Schemes

If you are keen to incentivise, retain, and reward key staff, we can design and implement an attractive and effective share option scheme for the benefit of your employees.

The four tax-advantaged share option schemes approved by HMRC are:

  • Enterprise Management Incentives (EMIs)
  • Company Share Option Plans (CSOPs)
  • Share Incentive Plans (SIPs)
  • Savings Related Share Option Schemes (also known as Save As You Earn, or SAYE, schemes).

Prior to implementing any scheme, we will consider the conditions in light of your company’s circumstances to ensure that it is most suited to your business.

There could also be tax advantages to the shareholders as a subsequent outcome of the scheme.

The Problem

The client had two employees who were key to the future growth of the company. The existing shareholder directors were concerned that the employees may look for opportunities elsewhere and were keen to encourage them to stay with the company by putting an incentive package in place.

The Solution 

We quickly established that an EMI Share Option Scheme would incentivise the employees by providing a mechanism through which they can become shareholders in the company.

By utilising an Employee Benefit Trust, the existing shareholders could also extract funds from the company in a tax efficient manner rather than their shareholdings simply being diluted by the issue of new shares to the employees.

Both the company and the employees were happy with our proposed solution so we implemented the EMI share option scheme, taking care of all the EMI share option scheme and Employee Benefit Trust documentation and agreeing the value of the shares with HMRC.

The Result 

The two employees have been given targets, which if met, will allow them to exercise the EMI share options over 15% of the shares each, in three tranches over the next 10 years.

When the shares are exercised; the employees will have no tax to pay on the benefit received, the shareholders will receive a payment for the shares (potentially paying tax of 10% due to the likely availability of entrepreneurs relief), and the company will receive a corporation tax deduction for the funds contributed to the Employee Benefit Trust to facilitate the purchase of shares.

Our client found that the performance of the two employees increased noticeably as soon as discussions over the terms were entered into – now that the EMI scheme has been implemented the results should be even better.

The Problem

PD Tax were appointed to assist a group of shareholders in selling their business to a third party. It was important to them that they sold their shares in the company to optimise their tax positions.

However, after carrying out due diligence, the buyers decided that they did not want to buy the trading company from the sellers because they thought that the company had undertaken an aggressive employee benefit trust (EBT) tax arrangement in the recent past (PD Tax did not advise on the EBT arrangement).

The buyers suggested that they buy the trade and assets from the trading company, as they were still keen to make the acquisition. However, this was not in the interests of the sellers because this meant that they would suffer a much higher rate of tax than if they sold the shares.

Therefore the EBT became a sticking point in the deal.

The Solution 

PD Tax worked with the sellers to develop a structure which meant that they could retain a low tax rate, whilst retaining the company which had carried out the planning, thus allowing the purchaser to acquire a new “clean” company.

We were able to develop a practical solution to the problem and the buyers were happy to utilise our proposal to overcome the EBT arrangement, as far as the sale was concerned.

The Result 

With the support of PD Tax, the sellers were able to complete the sale without further discussion regarding the level of consideration for the business.

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Remuneration Planning

For many years, the standard way for a business owner to receive remuneration from their company is a mixture of a small salary and dividends. Provided that the balance is right, it is possible for a business owner to substantially reduce the tax and NICs due on their income.

However, it is important that other options are also considered to ensure that funds are extracted from the company in the most tax-efficient way, such as:

  • Interest on a director’s loan account
  • Letting property to the company
  • Pension contributions
  • Restructuring of the shareholding to involve spouses and/or other family members
  • Trivial benefits

PD Tax can work with you to consider your options for remuneration for each year, and help identify any tax planning opportunities going forward in light of your personal and professional goals.

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Property Tax

If your business owns land or property, then it is important to consider your responsibilities with respect to reporting income and/or gains received and paying any tax due.

By taking pro-active advice, you may be able to reduce your business’ tax bill.

If your business receives rental income from a tenant, either from UK or overseas property, then it may be subject to tax on its profits and be required to report the income to HMRC.

We have assisted many clients in identifying allowable expenses and helping them reduce their tax bills.

SDLT applies on the purchase of interests in land in England and Northern Ireland (Scotland and Wales have their own Land and Buildings Transaction Tax – not covered here).

With recent changes to SDLT and the introduction of the 3% surcharge, many taxpayers are finding it increasingly difficult to determine if and how much SDLT they may have to pay.

PD Tax can help you understand what reliefs and exemptions may be available to ensure that your business does not face an unexpected and unwelcome tax bill or overpay tax unnecessarily.

ATED is an annual tax charge levied on corporate entities (companies and partnerships with a corporate member) which own high-value residential property in the UK.

It’s important to note that there are a number of reliefs and exemptions available, such as where the property is let out on a commercial basis or where the property is a farmhouse used as part of a working farm.

The current year rates can be found on the HMRC website.

All corporates with properties within ATED must submit an ATED annual return, even if a relief applies. PD Tax can help identify any relevant reliefs or exemptions and assist with the preparation of returns.

If you are thinking of selling your business’ property, you may benefit from tax advice prior to the sale to ensure that the sale goes ahead in the most tax efficient way and that all available allowances and deductions are claimed.

In determining the capital gain on which tax may be charged, we will always consider the availability of reliefs, including business rollover relief and the indexation allowance.

If you are selling commercial property, then VAT and capital allowance considerations should also be taken into account.

Stamp Duty Land Tax: Further Reading

Stamp duty land tax (SDLT) was introduced in 2003* and since then has been subject to extensive reform.

SDLT is charged on the purchase of interests in land and is payable by the purchaser. It is calculated based on the consideration paid, and includes not only money but also money’s worth (e.g. the assumption of a mortgage).

SDLT is currently charged on a ‘slice’ basis (like income tax). This means that SDLT is charged at increasing rates for the amount of consideration that falls into the different SDLT bands.

Different rates apply depending upon whether or not the property is residential or mixed/commercial and whether the individual buying the property is an individual or non-natural person (e.g. a company).

Higher SDLT Rates

Since 1 April 2016, all purchases of residential properties have been subject to an extra 3% on SDLT in each band where the purchaser is either:

  • a non-natural person (e.g. a company), or
  • an individual who already has a dwelling and isn’t replacing their main residence.

These new rates are subject to a number of special rules and transitional provisions. Extra care must be taken when considering whether the higher rates will apply as these rules can catch taxpayers by surprise leaving them with unexpected tax bills or having paid the higher rates when they aren’t applicable.

Since 2012, a special rate of 15% on the total consideration paid has applied to the purchase of residential properties by non-natural persons. This special rate is separate to the recent 3% increase to each SDLT band.

The threshold for this special 15% rate was originally set at £2million but from 2014 has been reduced to £500,000.

* From 1 April 2015 land in Scotland is subject to the Land and Buildings Transaction Tax and is not covered here.

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HMRC Enquiries & Voluntary Disclosures

Do you have previously unreported income? Are you subject to an HMRC enquiry?

The PD Tax team understand that corresponding with HMRC can be daunting, and have helped many clients deal with tax investigations and disclosures.

Enquiries

If HMRC have enquired into you or your business’ tax affairs, we can support you throughout the process and liase with them on your behalf to ensure that any misunderstandings are resolved and that your best interests are protected.

We have dealt with enquiries in the full range of taxes, including enquiries through:

  • Specialist Investigations
  • HMRC Local Compliance
  • Code of Practice 9
  • Code of Practice 8
  • Offshore Coordination Unit

Disclosures

Where you have previously unreported income and are keen to settle your tax affairs, we can provide advice regarding the most appropriate avenue for disclosure, consider whether a disclosure can be made under an HMRC targeted campaign, prepare the relevant documentation, and negotiate with HMRC in order to secure you the best possible result.

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Employment Taxes

At PD Tax we can provide comprehensive advice on all employee related tax matters, from benefits in kind and deductible expenses to termination payments.

We will consider all avenues for remuneration to staff, including salary sacrifice schemes, pension contributions, and bringing in employees as shareholders, to ensure that both the business and employees get the most tax and NIC efficient result.

We can also provide detailed assistance in relation to key risk areas that remain a potential pitfall for some employers, including:

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Exiting a Business

Whether it be retirement or plans to start a new business venture, there comes a point in every business owner’s life when they wish to cash in on their equity and/or wish to work in it less. While some business owners may choose to close down the company and distribute the funds and assets, others may instead choose to pass it onto the next generation of key staff or family members.

By taking into account you and your company’s circumstances and your intentions for the future, PD Tax can identify the most tax efficient route for your exit and consider the availability of any reliefs, such as Entrepreneurs’ Relief.

We can assist in the completion of all the necessary paperwork to facilitate the plan or can work with other professional advisors if appropriate.

Reorganisations

It may be that you are considering altering the share capital in your company, reorganising a group of companies, or looking at looking at protecting company assets by inserting a new holding company.

In terms of disposing of a business, a sale may be structured by a sale of the shares to another individual or corporate entity, or alternatively via a sale of assets held by the business.

It is important that prior to undertaking a reorganisation that you receive comprehensive tax advice to ensure that the transaction is commercial and that you will not be charged with unexpected and unwelcome tax bills.

PD Tax have helped many clients navigate the complex rules in this area. Taking into account all the relevant taxes and the commercial implications of the reorganisation, we have worked with our clients to ensure that they achieve the best result.

The Problem

Two director shareholders of a successful trading group decided to go separate ways after they disagreed about how the business should continue.

Within the corporate group was a commercial property from which the main trading company operated and paid rent.

The directors agreed that one party should buy the other out, however the exiting director insisted on retaining his full interest in the commercial property.

The directors were therefore worried about the significant negative tax implications of extracting the rental property directly from the group structure.

The Solution

Following discussion with the shareholders, we created a bespoke plan to demerge the group into its trading and rental activities before allowing the exiting director to be bought out from the trading activities.

We then prepared a detailed claim for advance clearance from HMRC to confirm they wouldn’t seek to counteract the proposed restructure and buy-out with anti-avoidance legislation.

The Result

HMRC duly granted clearance allowing the proposed restructure and buy-out to go ahead as planned.

Overall the plan successfully saved SDLT charges of up to £19,500 and the potential for HMRC to claim that there had been a distribution of the property.

The Problem

Two brothers wished to split their business interests following a fallout of the families. The dispute became difficult and they needed someone to help them structure the demerger in a way that mitigated tax leakage as far as possible.

The Solution 

We were engaged jointly by the brothers.

Our advice was provided on an independent basis to the solicitors and accountants for each brother. Firstly we set out how the split could best be achieved in essence, in a manner that was as close to tax neutral as possible.

When the parties had each agreed to the method of restructuring, we wrote to HMRC to gain their clearance to the proposed transactions.

On receipt of clearance we set out the tax implications of the transactions in full detail and the accountants and solicitors formulated a deal around the values and the tax implications affecting both sides.

The Result

The deal went ahead as suggested by PD Tax.

A statutory demerger of one of the companies. The other company being split by a S110 demerger followed by a buy-back of shares.

The only tax cost suffered by the parties was SDLT in relation to properties transferred through the statutory demerger. As a bonus, a piece of development land should receive a tax free uplift in base cost on a future sale.

Positive comments were received from the professional advisors on both sides as to the advice and level of service provided by PD Tax.

The Problem

Our client had plans to retire from business and close down his two companies within three years.

The companies held two letting properties which he was keen to retain ownership over as he expected them to experience significant price growth in the forthcoming years.

Our client was unsure as to the most efficient way of transferring the properties into his personal ownership and was concerned about his tax liabilities, both on the disposal of the properties and liquidation of the companies

The Solution 

We sat down with our client and formulated a plan to transfer the properties and wind-down the companies in a cost-effective and commercially beneficial way.

This involved inserting a new holding company with no trading history to which the properties could be transferred. Once all liabilities had been paid and remaining other assets had been transferred to the new company, the two businesses could then be liquidated/struck off.

We guided and supported our client throughout this process by liaising with HMRC, applying for necessary reliefs and corresponding with solicitors.

The Result 

This restructuring enabled our client to retire from the business within the desired time frame in an economical and practical way.

Going forwards, he will be able to draw down rental income from the new company as dividends.

Some of the shares in the new company may be transferred into trust in the coming months, in order to start planning for Inheritance Tax.

The Problem

A couple were undergoing the process of divorce, and a significant part their wealth was tied up in a property company owned by one of the spouses. The family court ordered that all assets belonging to the couple were to be split evenly between both parties, including the company/properties.

We were instructed by the courts to act on behalf of both parties to facilitate an equal division of the company and the properties (valued in excess of 1.7m).

The Solution 

Both parties were consulted to gain an understanding of how they viewed the business, in order to ensure that the correct tax analysis was applied from the start. We determined that the most tax efficient way to divide the business was through a capital reduction demerger.

We applied to HMRC for pre transaction clearance, to obtain agreement in advance that the demerger met certain transaction rules. Upon receipt of this, we prepared a full step by step plan for both parties on how the demerger should be facilitated.

Following this, we provided support and guidance to the parties as each step was implemented, including discussions with their respective accountants and solicitors.

The Result 

The business was partitioned into two completely separate companies. Each company was owned and controlled by a single spouse respectively, separately controlling a 50% share of the former property portfolio.

The planning and structure of the demerger meant that no capital gains tax or income tax was payable on the relevant transactions, and only a small amount of stamp duty land tax was payable overall.

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