A new company start-up incentive

Entrepreneurs can now get their hands on the Taxman's generous new company start-up relief. But creating a new company can increase the tax bill for others associated with it. So is it worth the effort?

Introduction

SEIS might be the offspring of the Enterprise Investment Scheme (EIS), but the initials don't stand for Son of EIS, but Seed Enterprise Investment Scheme. From April 6 SEIS is available to those who buy shares in new company start-ups. It offers immediate 50% income tax relief and the potential to defer tax on capital gains. Plus, SEIS investments made in 2012/13 get the bonus of not just deferring tax on capital gains, which can be as high as 28%, but completely exempting it.

Corporation Tax drop

A little over a year ago the main Corporation Tax (CT) rate was 28%, but from April 1 it dropped to 24%, and is likely to fall further. At first sight it might seem that companies which make annual profits of £300,000 or less won't benefit from the falling rate because they only pay tax at the small profit rate (SPR) of 20%, but actually it can affect those with profits as low as £50,000.

Associated companies

Two or more companies controlled by the same shareholders are treated as "associated" for CT purposes. The effect of this is that the £300,000 SPR limit is divided between each associated company (but to no less than £50,000). So the recent cut in the main CT rate means the extra tax two companies would have to pay as a result of being associated is now a maximum of just £12,000 (£6,000 per company), i.e. £150,000 profit x 2 x (24% CT - 20% CT). And where either company's profit is less than £300,000 per year, the detrimental effect of being associated will be even less.

SEIS and CT - what's the connection?

SEIS is a personal tax incentive for investors while CT rates relate to company profits, so where's the connection? The link is an entrepreneur who has or wants to have fingers in more than one company pie.

Example part 1. Gerry is the major shareholder in a print firm, Acom Ltd. He wants to start a high street print service for smaller jobs; to raise capital for this he's asked a few former colleagues to invest. The trouble is the associated company rules mean the new venture might increase Acom's CT bill. Alternatively, if he starts the new trade as a division of Acom to avoid the associated company trap, this will mean he and his co investors will lose out on the SEIS tax breaks. Gerry needs to see how these options stack up against each other in terms of tax.

Example - part 2. Gerry will be putting £50,000 into the new venture which means his overall tax bill will be reduced by at least £25,000, possibly up to £39,000 if he can do this through SEIS. Even if the new company is associated with Acom, the extra CT it faces will be nil where its profits don't exceed £150,000, and a maximum of £6,000 each year if they reach £300,000.

Tip. Entrepreneurs should aim to use SEIS in 2012/13 as the tax breaks are more generous than for later years. They should compare the personal tax savings against any increased CT bill caused by the associated company rules. But bear in mind that £1 of personal tax savings is, as a rule of thumb, worth £2 of CT.

The Seed Enterprise Investment Scheme offers shareholders of new companies tax savings worth 50%, and for 2012/13 up to 78%, of the amount they invest. This is likely to outweigh the extra Corporation Tax triggered by the associated company rules in most cases, but make a check of the figures to be sure.

If you need any more information on corporation tax or on any other tax issues, please get in touch with us on 0191 386 4786 or by emailing information@westwaters.com

A new company start-up incentive

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