HMRC (HM Revenue and Customs) and the UK government have provided much better incentives for start-ups than in most other countries – SEIS, EIS, R&D Credit, Entrepreneur’s relief, etc. We at CityFALCON have taken advantage of most of these benefits, and raised money and hired people as a result of some of these initiatives. But we also have some recommendations for HMRC that could further help growth of start-ups in the UK.
Before outlining these ideas, it is worth noting that you may be tempted to say that most of the recommendations, if implemented, could be taken advantage of by people who want to play the system. But it would be wrong to punish the innocent entrepreneur due to the failings of a few corrupt individuals.
EMI options for contractors
Start-ups like us would like to scale up and down quickly based on the amount of cash in bank accounts, along with other factors such as market demand. Thus, contractors are often a more suitable option than employees. Also, start-ups usually can’t afford to match market rate salaries that the big corporates offer. The only way we can compensate is with cash plus options, and this strategy is not currently available for contractors under the EMI scheme.
Let businesses decide EMI options pricing with investors
The stock options of start-ups are worth nothing when the business is initialised, and there is only a 10-25% chance they’ll be worth a significant amount of money in the future. The EMI options scheme is great but the whole process takes too long, especially with regard to agreeing the pricing with HMRC. It’s in an investor’s interest to keep the exercise price of these options high, but at the same time employees may demand higher numbers of options if the price is too high. It is logical to let these dynamics ultimately decide the price.
Online submission of documentation and responses
When dealing with documentation, approvals, and so forth, we had to send physical documents and wait for physical approvals. Also, when our SEIS1 application was approved, we got physical forms to fill in for all investors. And we concluded from this process that there has to be a more efficient way than the existing approach.
Incentives for entrepreneurs to leave their comfortable jobs
While investors acquire several benefits from investing in start-ups through SEIS, EIS, uncapped tax free capital gains etc., and their downside is limited if the company fails, there are no benefits for entrepreneurs who quit their jobs, and ultimately take the risks. Entrepreneurs relief is the only benefit for us. In fact, even if we put our own money into the business, we don’t get any SEIS benefits. This is simply not fair!
We recommend some kind of tax off-set in future years for entrepreneurs whose ventures fail. This can be based on their previous year’s tax paid with an upper limit. Opportunity cost of an entrepreneur is a real investment and not any different from cash put in by an investor.
3 years clause for SEIS and EIS needs an exception
Imagine this… you built a product, gain traction and got acquired within a couple of years. But your investors who supported your SEIS and EIS rounds will not get the benefit of tax-free capital gains because the company was successful. You then have to pay lawyers to structure the sale and purchase agreement in order to plan your taxes.
While the 3 years clause makes sense for any secondary sale of shares by investors, there needs to be an exception for when the company or significant assets are sold off.
Simplify documentation for EMI, SEIS and EIS
Even though I’m a qualified accountant, I find the documentation for EMI, SEIS and EIS to be onerous. Most entrepreneurs end up paying thousands of pounds in fees to lawyers and accountants. Why can’t it be as easy as filing your tax returns online? I see no reason why this isn’t achievable.
Simplify R&D credit application
R&D credit is one of the best benefits for start-ups in the UK, but the laborious process means that entrepreneurs need to pay out up to 30% of the refund to service providers. In fact, R&D application seems to have become a multi-million pound industry in the UK. A simplified process and calculation for claims below a certain amount could save a lot of time and money for start-ups.