Right now there are opportunities to generate cash in your agency that are much simpler than the sweat, blood and tears that goes into searching for, delivering and getting paid for projects.
The problem is that you have so much on your plate keeping everything else spinning that you just don’t get the headspace to explore these opportunities.
And this isn’t about tax avoidance schemes or high-risk schemes. This is about genuine tax planning initiatives that are designed and encouraged by HMRC and its offices.
Tax planning puts cash on your bottom line:
Tax planning and tax reliefs enable you to build additional cash in your business for reinvestment, drawing down or just giving you that much needed breathing space. And there are different tax opportunities available as an agency evolves. Knowing what these opportunities are beforehand is key to maximising their benefits.
All agencies are at some point a start-up that evolves through expansion to a point where selling the business becomes an option. We’ll follow this journey and detail the tax major opportunities that are available at each stage of the journey.
Using Technology to spot the opportunities
Recently we hosted a webinar with Adam Owens of Diagnostax, and Adam Kotas of ForrestBrown to drill down on tax planning opportunities for digital agencies.
The tax legislation is hugely complex, and having an accountant on board isn’t good enough if you want to maximise tax opportunities that are available. And that’s where Diagnostax and Forrest Brown come in: they help accountants and agency owners identify tax opportunities that are immediately available, and in the future.
Apart from tax saving opportunities that may be overlooked in the immediate term, your planning becomes more proactive because you can build in tax savings or reliefs when planning and budgeting for future expansion or individual projects.
Diagnostax provides tax diagnostics software, which is designed to help identify tax saving opportunities for owned and managed businesses, like digital agencies. Forrest Brown help companies with their R&D claims, which is a valuable government incentive that helps support businesses on their creative journey.
Both Diagnostax and ForrestBrown offer cutting-edge technology as well as services and consulting that blends in perfectly with the forward-thinking approach of MAP.
In the beginning:
The prime focus of most start-ups is funding. But many owners of budding agencies don’t know about the benefits of EIS or SEIS. Both are tax reliefs that are designed to earn external investors in the company an incentive to invest in “high risk” companies.
EIS (Enterprise Investment Scheme):
EIS is designed to help smaller, higher-risk companies raise funding. Investors can claim 30% of the amount invested in a company against their tax bill as long as they meet all criteria.
SEIS (Seed Enterprise Investment Scheme):
SEIS is a derivative of EIS and aims to encourage investment in new start-ups. Investors can claim 50% of the amount invested against their tax bill, also subject to meeting the prescribed criteria.
EIS and SEIS substantially reduce the investment risk for investors, and that’s what makes investors keen.
As your agency grows:
As any business grows beyond the boundaries of a start-up, the priorities shift, and the most important priorities usually are attracting and retaining key staff, investing in technology and business expansion.
There are many ways to invest in staff and many opportunities open to business owners, but share schemes are probably the most common. EMI (Enterprise Management Incentive) is a tax advantageous share scheme designed for small companies. Employees can acquire equity in a company with no tax charge providing it’s done within prescribed criteria.
It’s a great alternative to giving employees’ pay rises or paying out bonuses, and employees benefit from the growth of the business. This means more cash in the business, while employees are motivated to grow the business for their own benefit as well.
For business owners concerned about diluting control, different options can be built in so that employees don’t actually have ownership up until the point at which the company is sold. But if granting share options doesn’t appeal to you, there are loads of other ways to boost employee retention.
Structuring tax efficient remuneration is, of course, a benefit, but another way is to offer interest-free loans to employees if your business is cash rich. Loans of £10,000 are completely tax-free, so employees benefits, while the employer ties the employee down because if they leave the full loan amount must be repaid.
Investment in technology:
As most agencies grow, they are eventually faced with the decision of “are we a service business, or do we invest in product?” But many business owners don’t realise that there are tax reliefs available that can make the decision straightforward.
The government is keen on incentivising investment in new technology and patents. R&D tax credits apply to technology and are detailed further on, while patent box offer relief on patents. Profits derived from patented technology are taxed at only 10% if it meets the right criteria.
Often people don’t realise that they can patent technology that they’ve developed, so if you’ve developed innovative technology its best to discuss it with your advisor. A patent is useful from a tax saving perspective, and it protects your intellectual property.
And of course this doesn’t only apply to existing innovations, it’s very handy advice to have when planning for future investment. That’s why it’s so important to have the right advisors in place and tools at hand from the time you start your agency so that you can identify tax saving opportunities as your business evolves.
IP (Intellectual Property):
Another consideration is the value of intellectual property. Sometimes having valuable IP owned within the company can hold certain risks, like if the business goes under, you can potentially lose that IP as well. So placing valuable IP in a separate company is a definite consideration for agency owners. And there can be tax benefits in doing that as well. There are plenty of tax reliefs available.
Another option that comes with growth is international expansion, but for any business that comes with a lot of complexity. But there are tax saving opportunities under the right circumstances. VAT or sales tax legislation under different jurisdictions can be a stickler, but there is a scheme that allows for a single VAT rate on all trade within the EU.
And depending on the size of the international operation, consideration must be given to whether it should trade as a branch, or as a resident company within the jurisdiction. UK corporation tax rates are currently 19% and are going to drop to 17%, but there are other jurisdictions within Europe like Cyprus and Malta where corporation tax is as low as 5%.
As your agency matures:
Another decision that all agency owners will face at some stage is whether to sell their business and how to go about it. Whether it is sold internally to a management team, or externally, there are many different ways that a sale can be structured to save tax. The key is understanding the tax implications beforehand, and not considering them when the sale is already in process.
Can reduce tax on the disposal of a company to only 10%, which benefits the asking price if you’re looking to achieve predetermined net earnings.
Is a way of selling shares without any tax implications. There are a number of criteria that apply, but with some reconstruction, and the right advice it can be done.
Purchasing commercial property is another consideration that can come up somewhere in a business’s lifecycle. How the purchase is made can have important tax implications.
Purchasing a commercial property personally can be advantageous if you want to charge rent on the premises. It’s a way of extracting profits in a tax-efficient way. There are implications however that need to be considered, particularly regarding your estate.
Pension scheme registration:
Commercial property can be purchased through a pension scheme under certain circumstances, and rental income can be paid tax-free directly into the pension fund.
VAT is payable on the purchase of commercial properties which can be a cash-flow problem. The VAT liability can also increase other taxes payable because calculations are made on the inclusive price, but there are ways to plan around that. With careful planning and consideration before purchasing commercial property, you can eliminate cash-flow issues and reduce tax payments.
Many buyers don’t realise that they can claim capital allowances because it doesn’t apply to buildings. But it does apply to certain fixtures and fittings, and this is where buyers can miss the opportunity to claim.
R&D (Research & Development):
Another mostly unknown relief available is R&D allowance on building costs. Costs related to R&D that are included in the cost of the building can qualify for the R&D allowance claim.
More about R&D:
Although there are many agencies already benefiting from R&D, many others aren’t.
R&D is a government incentive for all businesses intended to support attracting and retaining talent, innovation and growing your business within the ambit of science and technology. Utilised well, R&D will put regular cash in your bank.
But to benefit effectively from R&D, you have to understand it and calculate the benefits into the planning stage of any projects or developments. Things like recording people’s time, identifying activates that qualify for R&D and real-time record keeping are an excellent way to ensure that you begin to generate cash from R&D.
Once you have all the facts at your fingertips, you can start to bring R&D into your calculations when preparing quotes and budgeting for future projects. You’ll be able to factor in the R&D benefits.
The area around R&D claims is vast and can seem complicated, so to maximise your benefits when submitting R&D claims its best to get advice. Submitting robust R&D claims that HMRC understand are a sure way of guaranteeing approval.
Considering UK tax legislation is over 18,000 pages contain over 1,000 different tax reliefs and allowances, no business owner can afford to go it alone. It’s well known many tax reliefs, and allowances are under claimed, and that’s why appointing advisors and harnessing technology will actually save you money that will more than compensate for the expense.
Our Tax Diagnostic meetings involve a full review of your business structure and personal finances to identify opportunities to better plan and mitigate tax now and as your circumstances evolve. Book your discovery call here to find out more and meet a member of the MAP team.