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Setting up a tech company: what are the tax implications?

Taking the decision to make the transition from sole trader to operating as an incorporated company can be a daunting one. Along with the practical commercial considerations, tax is often a primary factor, which will impact on your decision on whether or not to set up a UK company.

There are several tax benefits available to UK technology and media companies, particularly relating to developing new products and innovations in the sector. Companies are often the best vehicle to take advantage of these tax benefits.

The following tax factors should be considered when deciding to incorporate a technology and media company in the UK.

Getting started – tax compliance

Corporation tax

Companies are subject to corporation tax (currently at a rate of 20%) on the profits they make. You must notify HM Revenue and Customs (HMRC) that your company may be liable to pay corporation tax within three months of setting it up. The easiest way to do this is using the joint registration facility when incorporating your company at Companies House or by using HMRC's online registration facility. 

You must send a company tax return online to report your company’s corporation tax to HMRC. You must still do this if you have nothing to pay, unless HMRC tells you not to because your company is dormant for corporation tax purposes.

Company tax returns must be submitted to HMRC annually, within 12 months after the end of the period to which the return relates. A company must normally pay any corporation tax due nine months after the end of the company's accounting period.

For further information click here.

VAT

You must register the company for value added tax (VAT) with HMRC if your company's annual taxable turnover exceeds a certain threshold. This is currently £82,000. However, the company can also register voluntarily if its taxable turnover is below this threshold.

The decision to register voluntarily for VAT will be driven by the VAT treatment of supplies made to the company's customers, (ie is the company required to charge VAT on supplies to customers at 20%, 5%, 0% (output VAT) or are the supplies of a type which are exempt from VAT?) and the VAT recovery position of the company. VAT incurred by the company on its purchases of goods and services (input VAT) will only be recoverable in the first instance if the company is registered for VAT.

If VAT registered, the company will be required to file VAT returns with HMRC every three months. The company will also need to account to HMRC for the excess of the company's output VAT over its input VAT, or claim a repayment of surplus input VAT.

For further information click here

PAYE and National Insurance

A company is the employer of its directors and employees so that it must operate PAYE and national insurance in respect of salaries and benefits paid to those individuals. 

You will need to register the company with HMRC for PAYE. HMRC will then issue your company with a tax code for each employee: this tells the company how much tax to deduct from the salary and benefits made to each employee. The company will be required to account to HMRC for the tax so deducted. The company will also need to file returns with HMRC in respect of benefits provided to its employees.

For further information click here and here.

Utilising available tax reliefs

Capital allowances

A company is not allowed to make any deduction or allowance for the depreciation of capital items when calculating its taxable profit or loss. Instead, a business is allowed capital allowances (CAs) to reflect depreciation in the tax position of the business.

The most common type of CAs are plant and machinery allowances (PMAs). A taxpayer must carry on a "qualifying activity" and incur "qualifying expenditure" on the capital item in order to claim PMAs.

The rates of capital allowances available to a company are complicated and, to a degree, depend upon the nature of the business. The value at which any assets are transferred from you to a newly incorporated company also needs to be considered. 

For further information click here.

Research & Development

Many, if not all, technology companies will spend some expenditure on Research & Development (R&D) at some stage in the company's life. HMRC offers generous R&D corporation tax reliefs for small and medium sized companies. From 1 April 2015, the tax relief on allowable R&D costs is 230% - that is, for each £100 of qualifying costs, your company could have the income on which corporation tax is paid reduced by an additional £130 on top of the £100 spent. The regime also includes a tax credit (currently 11%) on the amount of qualifying R&D expenditure which is payable to the company in certain circumstances.

In order to qualify, a company's R&D project must contribute directly to seeking an advance in the fields of science or technology or must be a qualifying indirect activity (for example, staffing costs). 

R&D capital allowances are also available to provide 100% tax relief on capital assets acquired for R&D purposes. 

You can claim both R&D relief and R&D capital allowances through your company's annual tax return. 

For further information click here.

Patent Box

To the extent that your company has any profits arising from a patented invention, or other medicinal or botanical innovations, then an optional corporation tax rate of 10% will be available (in time) on the proportion of the profits derived from:

  • Licensing or selling such rights.
  • Selling the patented invention or products incorporating the patented invention.
  • Using the patented invention in the company's trade.
  • Compensation for infringement.
  • This regime is known as the Patent Box Regime.

The benefit of the regime is being phased in over five years from 1 April 2013, with the full benefit being available from 1 April 2017.

For further information click here.

Investment tax reliefs and tax efficient staff incentives

Tax reliefs for investors in your company - EIS/SEIS

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) provide income tax and capital gains tax relief for qualifying investors in qualifying companies. 

The reliefs offer various income tax and capital gains tax reliefs to individuals relating to investments made in a qualifying company. EIS and SEIS were introduced in 1994 and 2012 respectively, and are a very tax efficient way to encourage individuals to invest in start-up companies. 

In order for your company to obtain EIS or SEIS status, you will need to submit formal applications to HMRC in respect of both schemes. HMRC also encourages companies to seek advance clearance applications to confirm whether a company is eligible for the relief prior to submitting the formal applications.

For further information click here and here.

Share incentives for staff members

Employee share schemes can provide an alternative or an addition to a salary as a way of attracting and rewarding key employees. They are an ideal way for start-up companies to incentivise employees and reward performance since they involve no cash cost to the company, (other than implementation costs.)  

The most tax efficient arrangements include enterprise management incentive (EMI) options, (which are specifically targeted at smaller trading companies), and employee shareholder status.

Where the company issues shares or grants options to employees and directors, the company will be required to notify HMRC, via HMRC's website online filing facility. In addition, the employees/directors may also want to consider making 'section 431 elections' to mitigate certain employment tax charges.

For further information click here and here.

Contributor: Natalie Stoter 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2015. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

TLT LLP is a limited liability partnership registered in England & Wales number OC 308658 whose registered office is at One Redcliff Street, Bristol BS1 6TP England. A list of members (all of whom are solicitors or lawyers) can be inspected by visiting the People section of this website. TLT LLP is authorised and regulated by the Solicitors Regulation Authority under number 406297.

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