Tax Incentives Can Help Your Profits; David Beech, Corporate Tax Partner, Deloitte & Touche Examines the Tax Implications for Businesses
Byline: David Beech
TECHNOLOGY companies often have high growth, high risk profiles with the cash constraints which many expanding companies have to deal with.
Fortunately, there are several tax incentives which have been introduced in recent years which can be very helpful in these circumstances.
One important issue facing technology companies, particularly in the early years, is paying their key staff well enough to retain them at a time when the company might not be able to afford high cash wages. The Enterprise Management Incentive scheme is an ideal way of providing substantial incentives to important staff without draining cash and profits.
The EMI is almost two years old and is proving to be a great success in this sector. It is a very flexible share option scheme which allows a growing company to provide shares for its key employees in an extremely tax-efficient way. Originally, the number of employees who could benefit from this type of arrangement was restricted but now a company can reward as many of it's staff as it wants in this way.
If the company is successful, the employee normally gets the opportunity to cash in on a sale of its shares and only pay 10 per cent tax on the profit.
Unlike previous share schemes, the EMI is not burdened by a raft of restrictive rules.
The Enterprise Investment Scheme is another of the more important tax incentives to help technology companies get started or to raise additional share capital. The EIS offers three important tax benefits to individuals who are willing to invest risk capital.
A 20 per cent income tax repayment A deferral of Capital Gains Tax, which could save up to 40 per cent taxation A tax-free capital gain on ultimate sale of the investment The first two incentives mean that for an investor who has generated capital gains in recent years, an investment of pounds 100,000 risk capital in a technology company could generate a tax refund from the Inland Revenue of pounds 60,000. …