Accounting Archives

How a UK startup can benefit from SEIS/EIS

February 20, 2023 No Comments

Every small business needs funding, and luckily, the UK has two excellent schemes to support small and emerging businesses – the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).

These government tax relief funds help investors recover proportions of the money they invest in small businesses, thus creating more opportunities for investment and helping small businesses get the support they need in the early years.

So far, the schemes have yielded promising results – there are 40,000 start-ups as of today, making it the country with the third-highest startup efforts globally. More startups also attract foreign investors who want to nurture UK talent, which is excellent for the economy.

So, what are SEIS and EIS schemes?

SEIS is a fund that caters to earlier-stage companies by giving them the money they need to grow and expand. It was started in the UK in 2012 and comes with multiple benefits for the investor, including:

Exemption on CGT from the sale of any shares of the startup, as long as the shares have been held for at least three years
Inheritance tax-free shares as long as they have been held for a minimum of two years
Income tax relief of 50% of the invested amount, up to £100,000 every year
Option to offset shares sold at a loss against income tax or CGT
Capital Gains Tax write-off worth 50% of the amount invested

On the other hand, EIS is a fund designed for more mature businesses seeking to grow. Established in 1994, this is a more well-known fund in the UK and allows investors to invest up to a million pounds per year (increasing to £2 million if at least £1 million of that is invested in knowledge-intensive companies). The benefits for investors include the following:

Option to carry back all or part of the investment amount in the year before the investment
Ability to defer up to 100% of the investment amount against CGT incurred up to a year before or three years after the disposal
Option to offset shares sold at a loss against CGT or income tax
Exemption on CGT for the sale of shares held for at least three years
Inheritance tax-free shares if they have been held for at least two years

Why do they matter for a UK startup?

It is easy to think of initiatives like EIS and SEIS as more paperwork for you. However, these schemes allow your investors to recover significant portions of the money they invested in your business.

This increases their potential return on investment if things go well and also reduces their losses by large percentages (30% for SEIS and 40% for EIS) if things go south, which gives them much more incentive to take a bet on you.

In fact, many angel investors require small businesses to be eligible for EIS or SEIS before they put their money down. So if you meet the criteria, make sure you apply in advance and ask a professional if you need extra clarification.

How does a startup qualify for SEIS and/or EIS?

SEIS allows you to raise up to £150,000 in total over the lifetime of your startup. To qualify for SEIS, your business needs to meet specific criteria:

Must have fewer than 25 employees
Must be unquoted at the time the shares are issued
Must not be engaged in any restricted trade activity
Must not have been trading longer than two years (this includes any trades that a founder may have made earlier and then transferred to the company)
Must not have any shares issued under EIS
Must not have prior support from Venture Capital Trusts (VCTs)
Must have under £200,000 in total assets, including the assets of any subsidiary companies
Must not be controlled by another company
The £150,000 must include any State funding (such as grants) received in the three years prior

Under EIS, your company can raise up to £5 million in any 12 months and up to £12 million over the company’s lifetime. The qualifying criteria are:

Must have fewer than 250 employees
Must not control any other company apart from qualifying subsidiaries
Must not be controlled by any other company
Must not be engaged in any restricted trading activity
Must have assets of less than £15 million (pre-investment) or £16 million post-investment
Must not have been trading for more than seven years (this becomes ten years for knowledge-intensive companies, usually defined as those with high R&D costs)

How should a UK startup apply for EIS/SEIS?

To apply for either of these, you will need ‘advance assurance’ from HMRC. This gives you pre-approval that your upcoming share fundraiser will qualify and you can use this to show potential investors that an investment may qualify for a scheme.

The application itself is relatively simple. You will need to include a business plan, details of your proposed funding and the name of at least one investor who has agreed to work with you.

Response times can range between two days and two weeks, so plan accordingly. And once the fundraising is done, you will need to hand in another form to the HMRC to help your investors claim their relief.

Over to you

The owners of qualifying companies should keep an eye on the relatively short list of items that have the potential to disqualify them. If there is even a sliver of doubt, they must consult a tax expert like Birdfynn Accountants.

We understand how finding the right funding for your business will always take work. That is why we take the responsibility so seriously.

We will review your business and its circumstances to assess which scheme would be suitable, Check if you fulfil HMRC’s SEIS/EIS/VCT eligibility criteria, advise you of a proper share structure for the business, and deal with the issue of shares to investors and update details with the Companies House among other things.

Let us explore how working with Birdfynn Accountants can be a big win for your business. We would love to learn more about what you want to accomplish—and why—with the funding. Please drop us a message here.

R&D tax relief: A beginner’s guide for UK businesses

March 3, 2023 No Comments

Research and development (R&D) tax credits are a UK government incentive launched in 2000 to reward UK companies for investing in innovation. Qualifying companies can secure a significant tax offset against their profits from their innovation activities via R&D tax relief.

As with each year, an increasing amount of money goes back into the UK businesses through this scheme; R&D tax credits are designed to encourage and stimulate economic growth – something the country needs now more than ever.

A bumpy start for the initiative

Even though businesses in the UK today can claim generous tax breaks on research and development, it was not always this way. The initial R&D tax breaks introduced in 2004 were reasonably high, but it was only in 2010 that it crossed the 200% limit.

The increase was apparently encouraged by British inventor Sir James Dyson’s observation that Britain might lose out on becoming a science hub if it did not review and increase the R&D tax credit relief.

Today, small or medium-sized enterprise (SME) R&D tax relief allows companies to deduct an extra 130% of their qualifying costs from their yearly profit along with the normal 100% deduction, to make a total deduction of 230%.

However, the rules surrounding this tax break can be quite hard to understand. That is why we have put together this handy guide breaking them down. But first, let us start with the basics:

What are R&D tax credits?

In the tax context, R&D refers to any activity pursued to advance science and technology and address current uncertainty in those fields. The guidelines state that the activity must lead to a ‘significant and perceptible’ advance and not just replicate what has happened before. In addition, the advancement of science/technology should occur due to concerted efforts and not as a lucky discovery or accident.

UK businesses engaging in R&D activity of this kind are entitled to a 230% tax break on the expenses incurred, including all consumables and staff costs as well some subcontract costs. In addition, loss-making R&D enterprises can claim a 14.5% tax credit of the surrenderable loss.

The guidelines state that the applicable R&D period starts when work begins to resolve the ‘scientific or technological uncertainty’ and ends when a solution has been found, or the work ceases. If problems arise later in the solution that requires new R&D, that may be included in the applicable period. However, routine tweaks and troubleshooting are not included here.

The R&D tax credit can be an excellent tax saving if your business engages in tech-related research. A big plus is that the tax credit can be claimed retrospectively for relevant work done in the last two years.

So even if you were unaware of it at the time, you could still benefit from the extra tax saving. Another plus is that the tax credit still applies even if the R&D venture failed to achieve the exact objectives. This is a big incentive for UK startups to take risks and tackle new projects.

How to claim an R&D tax break

The R&D tax break applies to your business if you:

Improved significantly on an existing product
Addressed key industry questions or uncertainties
Found more efficient solutions to existing problems
Identified new customer problems and found answers to them

R&D can be looking to solve a physical problem or via electronics; if you are developing software or apps, the projects most likely to be eligible are complex. They need to have used custom coding or involved your team in developing innovative technology. This means you could have:

Trialled new computer code or materials
Built bespoke software, websites, apps or CRM systems
Created web-based apps you consider to be original and creative

If you feel the above points are relevant to your business, these are the steps you will need to follow:

On your company tax return, place an X in box 99 and the sum multiplied by 230% in box 101.
Add the enhanced sum to your profit and loss calculations in boxes 3 and 122.
If you want to convert your tax relief into credits, add the due amount to boxes 87, 89 and 143 and mark the box stating ‘repayment due this return period’.
If you make a repayment claim, you must pass a compliance check by HMRC first. This is where you provide supporting evidence for why your work deserves an R&D tax break and proof of your calculations.
HMRC may pay you the entire claim amount in one go or make an interim payment first, and the balance after all enquiries are concluded satisfactorily.

Activities unlikely to qualify for the R&D tax relief include:

Business processes that relate to improvements that are directly related to people and not technological improvements;
Creating apps or sites using well-established technologies
Doing work related to User Experience (UX), including design and content

Even if you fail to improve the products or processes, your attempts may still count as R&D-qualifying expenditure – this helps tech startups to continue experimenting with new ideas even when they do not have the means to fund them.

From 1 April 2023, licence payments for datasets, data processing costs, and cloud computing expenses will become eligible for qualifying expenditure.

Take the help of a tax consultant for R&D tax relief

Over the past decade, accountants have elevated their role as trusted business professionals. In fact, it is now the norm to discuss a business’s long-term goals and succession plans and even advise on pension schemes and investments. Discussing R&D tax should be a given.

Figuring out exactly which projects and costs qualify can be tricky, though, especially if you are new to filing these claims. That is why we recommend consulting a tax professional who can submit accurate records and advise you on the best time to make your claim.

For instance, you do not necessarily have to wait until you have a full year of accounts to file your claim – if the first, say, four months have involved highly high costs, submit a claim and get the money back so that your business continues to have enough funds.

If you have any questions about R&D tax credits, contact us. At Birdfynn Accountants, we understand what counts as a qualifying expenditure, how to apply for relief, and how to tackle a compliant claim. Get in touch with us today!

A quick guide on landlord Self Assessments

March 3, 2023 No Comments

A Self Assessment tax return is a paper or online form you submit to HMRC to show your taxable income, enabling the taxman to determine whether you paid too much or too little tax.

People who earn income from investment properties, self-employed individuals, and ministers must file a tax return. However, a common misconception among landlords is that since they pay taxes on their work income, they do not need to tell HMRC about rental gains.

That is simply not true. A tax return covers all earned income, irrespective of where the income is from. The additional tax must be paid, either through a Self Assessment tax return or an adjustment to your PAYE coding notice.

Landlord Self Assessments: A daunting prospect for most

Before we further explore Self Assessment tax return property incomes, it is crucial to understand that the profit from rental earnings, not income, are taxed. Profits equal rental revenue minus expenses, provided they can be deducted.

If a landlord’s taxable profits are more than £2,500 or their rental income before costs are more than £10,000, they must file a Self Assessment tax return, including the property pages.

If you own the property with someone else, you will have to keep track of your share of rental income and costs separately. The joint owner must report their part individually.

Self Assessment tax returns should include all taxable income, not simply rental income and expenses. If a tax deficiency emerges, HMRC must be paid. If you overpay tax, HMRC reimburses you.

If you are not already registered, Self Assessment registration for landlords should be completed by 5 October in the tax year after you start to receive rental income.

Steps to filing landlord Self Assessment tax returns

If you earn rental income, you must consider the tax consequences and choose the best strategy for handling it, including whether or not it has to be declared.

To minimise your concerns and queries, we have created this landlord Self Assessment guide, which will help you understand the many steps of the landlord Self Assessment process and how to pay taxes on rental income.

1. Register for Self Assessment

If you have not yet enrolled for Self Assessment, you must do so by 5 October of the tax year following the one in which you started your landlord business, i.e., started collecting rental revenue.

For instance, if you started renting in the tax year 2022–2023, you must register for Self Assessment by 5 October 2023. HMRC may penalise you if you do not register before the deadline.

You will obtain a user ID and password when you register. Set up your personal tax account to handle your taxes online. You may file your tax return online or on paper after registering.

MTD ITSA ultimately aims to eliminate paper tax returns. If you are a landlord making more than £10,000 a year, you must sign up for MTD by April 2026.

2. Keep your paperwork in tip-top shape

To figure out your taxable profit, you need to keep track of how much rent you get from tenants and how much you spend on items associated with your landlord business. If HMRC opens an investigation, they may want to look at your documents. To be on the safe side, maintain records of your:

Bank statements
Mileage logs
Rent books
Invoices
Receipts

It is recommended to keep your records for at least 22 months after the end of the tax year that the tax return pertains to avoid potential penalties from HMRC for having inaccurate records.

If you file your 2022 to 2023 tax return online by 31 January 2024, it is essential to retain your records until at least the end of January 2025.

3. Work out landlord tax deductions

Many landlord expenses are tax deductible. These deductions help you calculate Self Assessment property income and total taxable profit. However, your expenditure must be “wholly and solely” for renting property. Allowable costs include:

Property repair and maintenance costs (but not improvements)
Accounting and letting agents’ fees
Replacement of domestic items
Landlord insurance
Running costs

4. Fill in the landlord Self Assessment tax return

When you submit your tax return information online, HMRC’s system will remove any unnecessary sections and will ask you to customise the return based on your income. If you are a UK landlord, you will need to complete the section on UK property, in which you will provide HMRC with information about the following:

Rental income and other receipts from UK land or property
Revenue from letting furnished rooms in your own house
Furnished holiday lettings in the UK or EEA
Premiums from leasing UK lands

Everybody needs to fill out form SA100 for their tax returns. If you are self-employed, you should fill out SA105 and additional documents, such as SA103.

5. Stay on top of landlord tax deadlines

As a landlord, there are several deadlines you need to be aware of. If you choose to file your Self Assessment tax return on paper, it must be submitted to HMRC by midnight on 31 October. If you prefer to file your tax return online, you have until midnight on 31 January to do so.

This is also the deadline for paying your taxes and opening an account to make advance payments towards your bill for the next tax year. If you fail to meet the deadlines for filing your Self Assessment tax return, you may be subject to penalties.

6. Pay your landlord's tax

HMRC will calculate your tax bill and send it to you. If you filed your tax return by mail, you would receive a bill in the mail. If you filed your tax return online, you can view your tax bill by clicking “View your computation” on the HMRC website.

Your Unique Taxpayer Reference (UTR) number, followed by “K”, will be your payment reference. There are several ways to pay your taxes, including online or telephone banking through the Clearing House Automated Payment System (Chaps), paying with a debit or corporate credit card at your bank or building society, or using Bacs, direct debit, or a cheque.

Online or telephone banking is the fastest way to pay taxes, while Bacs, direct debit or cheque may take longer. There are penalties for not making your payment on time.

If your charge is over £1,000, you will also be required to make an advance payment towards your next Self Assessment bill. Account payments are due on 31 January and 31 July. If your bill is less than £30,000 and is due on 31 January 2023, you can use HMRC’s “Time to Pay” tool to set up an online payment plan. Time to Pay allows you to spread your payments over a year.

Over to you

HMRC provides detailed instructions for landlord Self Assessments, which can confuse new landlords. It is advisable to seek expert assistance if you need help with how to proceed. At Birdfynn Accountants, we specialise in helping landlords understand HMRC’s regulations, maintain their books of accounts, and file tax returns.

If you have any questions about Making Tax Digital for Income Tax Self Assessment (MTD ITSA), we can also help with that.

Contact us through the form on our website to learn more about how we can assist you in avoiding unnecessary penalties and filing your returns on time.

We offer a streamlined accounting service specifically designed for landlords to help them keep track of their accounting and tax obligations.