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, says 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,” says 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.”
“For example, you only have to look to the huge pool of funds now being marketed by private banks as ‘tax efficient discretionary AIM portfolios’. If the investment isn’t structured to qualify for the 75% taper relief level or relief from IHT, these funds are unlikely to look at you.”
G2i, the London Development Agency supported programme that helps early stage technology companies develop their business propositions and secure investment funding, believes business owners should 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 for example.
G2i encourages small and start-up companies to seek tax advice early on so they can:
- Be clear about what the company’s trading activity is – the tax authorities look carefully at companies with large non-trading elements on their balance sheet, for example, a fledgling business that has a large property holding may not be eligible for reliefs.
- Ensure prudent accounting and timely debt financing. For example, failing to write down the value of assets prudently or raising large amounts of debt can lead to businesses breaching the £15 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 significant tax relief, 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,” adds 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.”
Faced with choosing between two companies that both have equally good prospects, investors will inevitably choose to invest in the company that gives the tax-efficient return over the one that doesn’t.