It seems that Tech headlines are everywhere these days. From debates over the advancement of AI to major developments in the Tech we use on a daily basis, through to whatever is going on with Elon Musk in a given moment. Tech is pervasive, and whether we agree or not, we are dependent on it.
For businesses within such a rapidly changing sector, it is important to ensure that the regulatory, accounting and tax requirements are considered. These requirements, whilst seemingly dry, are integral to the growth and scalability of a Tech business.
From a tax perspective, there are many facets of the rules which also benefit Tech businesses, and some of these are explored further, below.
Research & Development (R&D) Tax Credits
R&D Tax Credits provide generous tax relief for SMEs who carry out R&D, although they have also made headlines over recent months, due to the tightening of the rules surrounding making a claim.
Since 1 April, the administration required in making an R&D claim has increased significantly, with companies now expected to pre-notify HM Revenue & Customs (HMRC) within 6 months following the end of an accounting period, that a claim will be made. There has also been a reduction in the level of relief available.
Nevertheless, R&D does remain to be a useful tool for eligible companies, which are able to:
- Deduct an 186% of qualifying costs from their yearly profit.
- Claim a payable tax credit if the company has claimed relief and made a loss. This credit is worth up to 10% of the loss which can be surrendered.
Where R&D is being done but a claim for R&D Tax Credits cannot be made, for example because the R&D project has been subsidised, it may be possible to claim relief under the less generous R&D expenditure credit regime, which is used by large companies, but which SMEs can also claim.
Making an R&D claim can be tricky to navigate, therefore it is always worth speaking to a professional adviser before proceeding.
Fast growing Tech businesses often need investment. In some cases, and particularly for newer companies, they could be qualifying companies within the Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS).
For both SEIS and EIS, where investment is sought from an individual, that individual may be able to benefit from income tax and capital gains tax (CGT) relief on that investment.
Any one individual can invest a maximum of £200,000 under SEIS per tax year, and they can receive 50% income tax relief on this. Individual investors are limited to no more than £1 million per tax year under EIS, for which they can receive income tax relief of 30%. The investment cap for the qualifying company is £250,000 for SEIS and £12 million for EIS.
EIS and SEIS can also be appealing to individuals who have made large capital gains, as provided their investment qualifies, they can obtain CGT relief. For EIS and SEIS investments, this would be by way of CGT deferral relief, and in addition, for SEIS investments only, an individual investor may also receive a 50% exemption for gains reinvested under the scheme.
Provided all the qualifying criteria is met, gains made if the EIS or SEIS qualifying company is later sold, can be free of CGT.
Both EIS and SEIS have strict requirements which must be met by both the investors and the company, for relief to be available. Therefore, professional advice should always be sought by both the company seeking investment and the individual making the investment.
Retaining key members of the team – Enterprise Management Incentives (EMI) share options
Recruiting and retaining key team members can be difficult. For fast growing Tech companies, they should consider granting tax efficient EMI share options in the company for key staff they wish to keep hold of and/or reward.
EMI share options are a type of HMRC approved employee share incentive which provides beneficial tax treatment for both the employees and the company.
Putting in place an EMI share option incentive is straightforward and involves granting a share option, which is a formal agreement between the company and the employee, to set out how many shares a person can acquire, how much each share costs, and when the option can be exercised for shares.
Option exercise can be triggered by any number of conditions, such as the length of employment, a target being met or as we commonly see, when the company is sold.
The aim of EMI is that employees will feel that they are integral to the growth of the company, such that the staff work together to increase the shareholder’s value.
To qualify for EMI, a company should have gross assets of £30m or less and fewer than 250 employees. Some sectors are excluded from EMI, but most companies in the Tech sector should not fall within this exclusion. The company should also not be under the control of another company.
Employees will be eligible for EMI where they do not already hold more than 30% of the company’s shares. They should not have share options worth above £250,000 (at the time of grant) and they must spend 25 hours weekly, and 75% of working time as a company’s employee.