UK Corporate Incentives for Investment, Innovation and Employees
The UK offers a range of targeted incentives designed to support business growth, innovation, and talent retention. From raising investment through EIS, to rewarding key employees via EMI share schemes, and supporting innovation with R&D tax relief, these regimes can play a central role in a company’s growth strategy when structured correctly.
EIS Fund Raising
If you are looking to raise funding for your business, you should consider the use of the Enterprise Investment Scheme (EIS). EIS fund raising is designed to help your company raise money to grow your business. It does this by offering tax reliefs to individual investors who buy new shares in your company.
Up to £5 million each year, and a maximum of £12 million in your company’s lifetime, can be raised through the use of EIS. This includes amounts received from other venture capital schemes. Please note that Knowledge Intensive Companies (KIC’s) broadly have double these limited).
Details are complex, but we can offer advice for you to progress through the process as smoothly as possible. Comprehensive advice regarding the scheme rules from Dixcart UK will ensure that your investors claim and retain EIS tax reliefs relating to their shares and we can also manage the whole process, from pre-approval to the issue of the EIS certificate.
Dixcart UK is a tech sector specialist and also offer expertise on the different rules that are available for knowledge-intensive companies that carry out a significant amount of research, development or innovation.
EMI Share Schemes
Incentivisation of employees is an important concern for employers who want to retain their key people and EMI share schemes is a tax efficient way of allowing employees to obtain a share in the company. Many employees want to share in the ownership of the company so they can benefit from an eventual sale.
From the employer’s point of view, an EMI share scheme is effective because it does not involve paying bonuses to staff and so there is no pressure on cash flow. A deduction from taxable profits can also be claimed for the value of the shares given for free, if employees do not pay for them.
EMI is an HMRC approved scheme designed for UK based, small and medium sized businesses. The scheme is flexible and the ability to exercise the share options (i.e. converts them into actual shares) can be based on conditions such as performance or length of service.
The key benefits of EMI are that key employees are retained; employees’ interests are aligned with those of the company, and the scheme is likely to result in a committed and motivated workforce.
Where the criteria for EMI are not met, there are some alternatives:
Growth shares
Where companies cannot use EMI, a growth shares are often used instead. Under this share scheme, on a sale of the company, employees benefit from only the growth in the value of the shares going forward, not the historic value built up until the date of share issue. This is achieved by valuing the company and issuing shares of a different class which only benefits from value above an agreed threshold.
For instance, if the company is worth £10m, a growth share may allow the holder to share in the proceeds, only if they exceed £12m. As such, the value of the growth share on issue would be very low. This is because it does not have the right to any of the value built up thus far. The income tax charged on acquisition of the share would consequently be very low.
Phantom share schemes
A phantom share scheme is essentially a cash bonus scheme. It allows an individual to receive a cash payment equal to the value of a share or the increase in value of a share above a notional exercise price: no actual shares or share options are issued. Individuals are incentivised because the level of any payment is linked to the increase in value of the company’s shares.
R&D Tax Credits
R&D Tax Relief is a Government backed incentive designed to encourage innovation and increase spending on Research and Development activities for companies operating in the UK.
Claims are often overlooked because business owners may over-estimate the level of innovation that is required in order to claim, do not know about the incentive, or simply suspect that it is too good to be true!
Qualifying projects are those that aim to advance the overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainties. Such projects may create or appreciably improve a process, material, device or product.
This means that a wide variety of business sectors can potentially qualify for R&D relief. It is not just ‘men in white coats!’
Prior to 1 April 2024 there were two R&D reliefs available, the first being the R&D Tax Credit scheme for SME’s and the second being the ‘Research & Development Expenditure Credit’ (RDEC) for larger companies.
For the purposes of R&D tax credits an SME must have fewer than 500 staff and either a turnover of less than €100 million or a balance sheet of less than €86 million. If the company has external investors or has received state aid grants, this could affect its SME status. Under some circumstances the company could claim under the separate scheme for large companies instead.
HMRC’s recent attitude towards R&D relief claims has become far stricter after a drastic increase in enquiries into R&D claims, irrespective of whether the claims are justifiable. It appears as though HMRC’s approach to R&D is to reduce the amount of false or inaccurate claims where real R&D is not present. In light of this shift in attitude it is now even more important to ensure your R&D claims are completed and filed by qualified agents capable of correctly processing the numerous documents required to file a successful R&D claim.
