Robots not required: a practical guide to enterprise tax reliefs

How many tax advisers will have been replaced by robots in 10 years’ time? I ask because it sometimes feels as though the vast majority of tax advice is saying what is been said before, which sounds like a good job for a robot.

There is a group of clients, however, which most certainly will not appreciate advice from a robot. These are entrepreneurial businesses, their founders, employees and investors. These people need advice that thinks ahead, takes a view over the entire lifecycle of a business and looks at the commercial issues they face, not merely their immediate tax mitigation issues.

This kind of advice takes the long view, and is always alert to the need for original ideas and pioneering solutions. Above all, this kind of advice is built on a trusted, ongoing relationship between client and adviser that positions the adviser as a partner, not someone who steps in to solve a minor problem and then goes away again. In fact, it means thinking like an entrepreneur, rather than an accountant. The ultimate aim is not tax minimisation so much as wealth generation.

When you take the long view of an entrepreneurial business with wealth generation in mind, a number of key ‘enterprise’ tax reliefs come to the forefront. At the Spring Conference I will run through a practical road map of these tax reliefs, including a technical guide, compliance, recent changes, interesting opportunities and challenges and pitfalls from our experience. Here I will simply offer an outline of the major issues at each different phase of the entrepreneur’s lifecycle. Those key phases are start up, growth, exit and high net worth entrepreneur/investor. 

Start up

• At this stage SEIS and EIS tax reliefs are critical to help the entrepreneur in raising the initial seed funding, often initially from friends and family.
• It is also worth keeping Entrepreneurs’ Relief and Investors’ Relief in mind, even though selling the company may seem like a long way off. At that point the founders’ main focus will be capital gains tax.

Growth

• Funding rounds may rely on EIS and VCT tax reliefs to help attract investors. Investors may want preferential rights and it is important to make these EIS/VCT compliant.
• Raising finance with complex share structures can inadvertently cause a loss of Entrepreneurs’ Relief and Investors’ Relief qualifying status. This calls for an ongoing health check..
• Employees are key to the success of a business, and that is even truer for a start-up. Small businesses need to offer exciting share plan incentives but a basic unapproved share plan can lead to tax liabilities for employees of up to 54.59 per cent – not great.
• More interesting alternatives are Enterprise Management Incentive (EMI) share option plans (tax rate of only 10 per cent for employees); Nil Paid Share plans (tax rate of 20 per cent – or even 10 per cent – for employees); and Growth Share plans (tax rate of 20 per cent, or even 10 per cent, for employees).
• Finally, R&D tax credits are an essential way to generate cash flow assistance in the early stages and reduce corporation tax liabilities in future.

Exit

• If all the above has been completed correctly, everything will just fall into place at this stage. Founders, investors and employees will receive returns on their investment in the most tax efficient manner, paying CGT at between 0 per cent and 10 per cent.
• However, company sales have their challenges, and ‘earn outs’ need to be structured carefully for different investors.

High net worth entrepreneur / investor

Now the entrepreneur has cash in their pocket and can get involved with other companies in a number of different roles: founder, investor, non-exec or multiple roles such as an investing consultant. They may also invest in various investment classes, which might include property – offering an opportunity to structure property ownership so it might qualify for Entrepreneurs’ Relief and be subject to 10 per cent rather than 28 per cent CGT.

The key to this entire process is focusing on wealth generation through capital growth rather than through income generation, although that is important too. This calls for an ongoing relationship with the client and, crucially, an attitude that problems can be solved, that the same solution you used last time is not necessarily the right one this time round.

After all, it makes life more interesting to know that you do not need to keep saying the same thing. It is also interesting to clients. We know from personal experience that some of the UK’s most successful entrepreneurs appreciate this kind of approach. 

The bottom line is that there are opportunities to organise the world of high net worth entrepreneurs and investors such that their future wealth generation can be taxed at single digit rates. That has got to be a lot more exciting than 45 per cent income tax rates.

And it’s certainly not a job for a robot.

Blog by David Marcussen, Managing Partner, Marcussen Consulting LLP, and an Associate Member of the Chartered Institute of Taxation. David will be speaking at the CIOT’s Spring Residential Conference 2018 in Cambridge. For more information on speakers and tickets, click here.