smallbusiness.co.uk: Helping your business think big

Tax-efficient thinking cuts risks and increases returns, says investment advice organisation gateway2investment. Start-up businesses can increase their chances of funding by taking early steps to structure their business to take advantage of the tax incentives available to potential investors, claims g2i.

Neil Pamplin of Grant Thornton, the lead partner in the g2i programme, says: ‘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.

The g2i programme, supported by the London Development Agency, helps early-stage companies develop their business propositions and secure funding and encourages business owners to consider tax planning as one of their key priorities. Structuring businesses in a tax-efficient manner ‘will allow potential investors to benefit not only from taper and inheritance tax reliefs, but also from the Enterprise Investment Scheme and Venture Capital Trust relief,’ states g2i.

Small and start-up companies should seek tax advice early and adhere to the following tips:

- Be clear about the company’s trading activity - the tax authorities look carefully at companies with large non-trading elements on the balance sheet - for example, a fledgling business that has a large property holding may not be eligible for relief.

- Ensure prudent accounting and timely debt financing - failing to write down the value of assets carefully or raising large amounts of debt can lead to businesses breaching the £7 million gross asset ceiling for EIS or VCT status.

- Take care when listing shares - AIM-listed shares are treated as ‘unlisted’ and can qualify for 75% taper relief (or a 10 per cent rate of capital gains tax) but this may not apply where shares are also listed elsewhere.

Says Pamplin: ‘This is a complex area, but the difference this can make to an investor’s long-term returns is huge, cutting their tax bills down to nothing in some cases. Two companies may both have equally good prospects but investors can flock to the ones that give the tax-efficient return.'

Find out about the Enterprise Investment Scheme.

More information on VCTs.

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