By taking better advantage of the tax incentives available, British start-up companies can boost investor interest, according to early-stage advisers gateway2investment (g2i).
“Entrepreneurs planning to use external funds to help develop their businesses will increase their chances of finding investors by ensuring they can benefit from tax efficient returns,” said Neil Pamplin of Grant Thornton, the lead partner in the g2i programme. “Businesses should be thinking about this right from the start. Those that get it wrong are likely to find their businesses are valued lower which can mean handing over a bigger stake to attract the required funds or, in the worst case, not being offered funding at all.”
A tax efficient business structure will allow investors to benefit from taper and inheritance tax relief as well as from the Enterprise Investment Scheme and Venture Capital Trust relief.
To this end g2i recommends new companies seek tax advice as soon as they can in order to maximize their investment potential. It is important that a company is clear about what it actually does; tax authorities look carefully at companies with large non-trading elements on balance sheet. It is also vital that there is prudent accounting and timely debt financing; there is a £7m barrier for EIS or VCT status. G2i also advises businesses to take care when listing shares – AIM listed shares are treated as ‘unlisted’ and can qualify for 75% taper relief (or a 10% rate of capital gains tax) but may not apply where shares are also listed elsewhere.
“Entrepreneurs rightly focus on bringing in cash from sales, but they should also be looking to qualify for these tax incentives to add value to the business and reduce dilution when raising funds,” says Pamplin.