Start up! Start up! Read all about it
There is an opportunity for resellers like never before, despite the worst economic downturn any of us can remember, says Peter Urey
Smartphone apps, social media, cloud and big data: add one good commercial idea and you can change the world from a kitchen table. Resellers with a solution mindset are perfectly placed to spot opportunities and build innovative products and services. Low-cost start-up possibilities exist in every customer segment. We have heard it all before - and where will the start-up dough come from these days?
Well, taxpayers are being given 50 per cent tax breaks to invest in start-up equity. If we are indeed “all in this together”, the wealthy are getting a huge incentive to support innovators developing the new products and services to restore our competitiveness.
The Seed Enterprise Investment Scheme (SEIS) began on 6 April 2012 and provides tax breaks for individual investors buying new shares in qualifying start-ups. Relief is available at 50 per cent of the cost of the shares, on a maximum annual investment of £100,000. The shares must be held for a period of three years.
• HMRC example 1
Jenny invests £20,000 in the tax year 2012-13 (6 April 2012 to 5 April 2013) in SEIS-qualifying shares. The SEIS relief available is £10,000 (£20,000 at 50 per cent). Her tax liability for the year (before SEIS relief) is £15,000 which she can reduce to £5,000 as a result of her investment.
• Capital gains reinvestment relief - Example 1
Neela sells an asset in June 2012 for £200,000 and realises a chargeable gain (before exemption) of £80,000. If she makes qualifying investments of at least £80,000 in SEIS shares in 2012-13, and all other conditions are met, the £80,000 gain will be free from CGT. She does not need to invest the whole £200,000 sale proceeds in order to get full exemption.
• Capital gains reinvestment relief - Example 2
Benjamin sells an asset in June 2012 for £200,000 and realises a chargeable gain (before exemption) of £80,000. If he makes qualifying investments of only £20,000 in SEIS shares in 2012-13, £20,000 of his gain will be exempt from CGT and he will be liable to CGT on a chargeable gain of £60,000 on the disposal of the asset in June 2012.
Shares must be paid up in full, and in cash, when they are issued. There is a limit of 30 per cent on the amount of the start-up that can be acquired by an individual. There are restrictions on which immediate relatives can invest.
You cannot become an employee of the company until the three years have elapsed, but a directorship is not classed as employment. Also, investors are barred from taking any “value” from the business until the three years end.
Qualifying companies must be less than two years old, have fewer than 25 employees and less than £200,000 of assets at the time of issue. Investment must go directly into the business.
These are not particularly restrictive conditions, especially given the likelihood of backing a winning business. Entrepreneurs still have a selling job to do, but the risk to the investor just halved. That’s a positive force for people building new businesses.
Some sectors are not eligible and it is important to check the HMRC website first at www.hmrc.gov.uk/-seedeis/-index.htm. Also, be aware of the risks; check out the National Endowment for Science, Innovation and the Arts (Nesta) website for more detail, including on likely returns. On average a portfolio of investments in start-ups has produced a 22 per cent return on the funding.
The SEIS connects capital with ideas at the earliest stage of the process, enabling innovators to find backers from a wider pool of investors without overly complex regulation.
The government is working with Dragons’ Den’s Doug Richards and Business Angel of the Year Dale Murray through the Growth Accelerator Programme to promote SEIS. This has the potential to turn acorns into oak trees. Time to network with every private client tax accountant in town?
Peter Urey is a management consultant at Fearless Innovation Management and The MPA Group