Legal Problems for Heropreneurs: Taxation Issues James Rivett Pump Court Tax Chambers Monday 15 October 2012

The UK tax code CORPORATION TAX INCOME TAX CAPITAL TAXES (INHERITANCE TAX, CAPITAL GAINS TAX) INDIRECT TAXES (VAT, SDLT, CUSTOMS AND EXCISE DUTIES)

Overview of the UK Tax Base All income and gains of a UK resident individual are subject to UK tax (but note no income tax on gallantry pensions) A resident individual who is domiciled outside the UK can pay to keep his foreign income and gains tax free (‘a remittance basis user’) A non-resident individual pays IHT and income tax but only in relation to UK situs assets/UK source income (but no IHT on gallantry award) Corporation tax paid on income and gains earned by companies resident in the UK (includes permanent establishments of overseas companies)

(1) Structure 1: The Sole Trader Merit of simplicity But commercial risks (unlimited liability) Difficult to attract 3 rd party funding Significant fiscal disadvantages for successful businesses (currently up to 50% rate of income tax on profits)

(2) Structure 2: Incorporation Strict regulatory regime (Companies House), incidental compliance costs (accountancy etc.) Commercial advantages (division of equity, limitation of liability) Fiscal advantages but care required with profit extraction (E.g. employment income/dividend) CGT on ultimate sale but possibility of Entrepreneur’s Relief of up to £10,000,000 Specific corporation tax regimes for transfer pricing/loan relationships and their impact upon financing Enterprise Investment Relief/Seed Enterprise Investment Relief

(3) Structure 3: The Partnership No statutory formalities; simply a state of affairs (see s. 1 of the Partnership Act 1890) but suggest formal agreement drawn up Commercial disadvantages (unlimited liabilities and cross-liabilities) No obvious fiscal advantages (transparent for income tax and CGT)

(4) Structure 4: The LLP Strict regulatory regime (Companies House), incidental compliance costs (accountancy etc.) Commercial advantages of company (division of equity, limitation of liability to amount of capital contributed) Fiscal advantages? Depends upon level of profits. Transparent for UK income and CGT purposes provided trading entity.

VAT Registration Liability for VAT on sales and recovery of input tax tax on overheads Cross-border aspects of the VAT Regime (intra-Community and extra-Community transactions)

Relief (1): Entrepreneur’s Relief Reduces to 10% the amount of CGT on disposal of ‘qualifying business assets’ up to a lifetime limit of £10million ‘ Qualifying business assets’ include shares in trading companies and certain other types of assets used in a business Available to individuals and some trustees but not companies Claimed in writing by first anniversary of 31 January following end of tax year of disposal

Relief (2): Seed Enterprise Investment Scheme Investors receive up to 50% tax relief in the tax year the investment is made, regardless of their marginal rate Company must be UK company with fewer than 25 employees The company’s trade must be no more than 2 years old The company must have assets of less than £200,000 Company must trade in an approved sector – generally not in finance or investment (e.g. property investment company) SEIS investors can input £100,000 in a single tax year which can be spread over a number of companies. Any one company can raise no more than £150,000 in total via SEIS investment Investors cannot control company receiving capital (no more than 30% stake in company)

Relief (3): Enterprise Investment Scheme Investors receive up to 30% of cost of shares against income tax liability for tax year of investment (up to £1,000,000) plus possibility of no CGT on disposal of shares Company must be UK company with fewer than 250 employees Company must have trade (or be parent company of trading group) The company must have gross assets of less than £15,000,000 before share issue Company must trade in an approved sector – generally not in finance or investment (e.g. property investment company) Companies cannot raise more than £5m in total in any 12 month period from the venture capital schemes (I.e. EIS, SEIS and Venture Capital Trusts)