Is my business too small for a tax saving scheme?

We’ve all seen the headlines recently about various individuals and organisations being investigated for potentially evading tax. But are there any other legal means of reducing your tax liability? Well just as no-one can be accused of “evading tax” by investing in their ISA, there are several other Government backed options open to businesses of all sizes that can help reduce the size of their own, their investors’, and employees’ tax bills.

In a previous article I talked about the potential savings that can be made by claiming Research and Development Tax relief. The Government has also been keen to promote investment in business by individuals via the “Enterprise Investment Scheme” (EIS) for established companies, and more recently the enhanced and more generous “Seed Enterprise Investment Scheme” (SEIS) for new start-up companies. As SEIS is directly targeted at new companies, the scheme rules dictate that the company must have both less than £200,000 of gross assets and 25 employees prior to the investment. This scheme promotes investment in trading companies by providing unconnected investors with income tax relief of 50% on the initial investment, followed by total exemption from capital gains tax if the shares are sold at a profit in the future. If the shares are subsequently sold at a loss, or the company fails, the remaining cost of the investment can be offset against the investor’s income or capital gains tax. EIS operates in broadly the same way, albeit investments are made into established businesses and attract 30% initial income tax relief.

Not only are these schemes a great way for small businesses to generate new investment, they also offer an ideal opportunity for financially well-established individuals to halve the risk of their investments via tax refunds and reliefs.

Established employers may like to offer shares to certain existing key staff they wish to retain, or to attract new employees. However, these employees may not have the available cash to subscribe for the shares on offer. An “Enterprise Management Incentive Scheme” (EMI) could be the answer. The EMI scheme allows certain companies to reward employees with share options worth up to £250,000 each. The process involves a valuation being established on the employing company’s shares at the date the employer grants the employees their share options. The employees then have the right to buy those shares at this earlier fixed value at a future date (exercise their options) upon fulfilling certain conditions the employer can decide. Logically this will often be on the achievement of growth targets by the employees. For example, if the shares are valued at £1,000 on the date of the grant, and increase to £5,000 on the date of exercise, the employees can buy their shares at a tax free discount £4,000. Hence the EMI scheme is an excellent way of both retaining key staff, and motivating them to grow the value of business for their own (and the employers’) benefit.

If a business owner would like to incentivise key employees without giving away equity in the company, it is now possible for even the smallest companies to provide a wide range of benefits such as company cars, childcare vouchers, computers and mobile phones through a “Salary Sacrifice” (SS) scheme. Employees choose one or more of these benefits they would like which in many cases are already being paid for from their take home pay. The employer then pays for them directly on the employee’s behalf, and deducts the cost from their salary. However, those deductions are made from the pre tax salary, so the employee saves the tax and national insurance on the cost of the benefits. Employer’s national insurance is reduced in the same way. For example a cost previously met from the employee’s taxed money for say £1,000 now costs them only £680, and also saves the employer £138 in employers’ national insurance.

EIS, SEIS, EMI and SS are complex schemes which must be administered by a suitably qualified tax adviser. There are many rules with regards to qualification criteria for each scheme. However all schemes, when correctly established, have hugely beneficial effects on the tax affairs of investors, employers and employees alike.