The old adage that tax considerations should not be the prime mover behind the choice of business structures remains true.  Where, however, there are a number of functionally equivalent choices to structure a business, the choice can be influenced by tax efficiency.

The major caveat with all tax advice is that it is highly time sensitive.  It is crucial that regular and timely tax advice (we generally work with external professional advisers) is sought and sensible that very long term planning is considered on the assumption that matters could well change.  In addition, all custom-designed schemes are subject to dislcosure to and registration with the Inland Revenue, which reduces their flexibility.

Within the limitations set out above, we at VSH have advised on a wide range of tax-driven business ownership and cash release structures over recent years, including:

DIVIDEND vs SALARY - here the tax and national insurance treatment of dividends is exploited to avoid the payment of either employers or employees national insurance on income taken from an incorporated business in the form of dividends.  As with most tax driven approaches, there are down sides - with this approach, income taken as dividends does not count towards the salary requirements for pension contributions, reducing the amount that can be placed in a pension fund.

SHARES and OPTIONS - there are a number of ways that individuals can be given equity stakes in a company.  With some companies it is possible to set up tax efficient Share Ownership plans, possibly combined with trusts that hold shares for distribution to employees, to allow employees to buy and/or be given shares in the company at preferential rates.  With smaller, start-up companies there is often a requirement to incentivise the managers by the issuing of share options that convert into shares at a low price per share but only if the company does well.  Here a number of different schemes may be applicable, most notably the Enterprise Management Incentive (EMI) scheme.  VS&H have wide experience in the drafting, implementation and management of such schemes.

EFFICIENT INVESTMENT - there are a number of vehicles for investors who wish to take small equity stakes in fast growing (risky!) companies.  For individuals, income tax relief may be available under the Enterprise Investment Scheme (i.e. the investment amount can be deducted from the investor's taxable income in the year that the investment is made) and capital gains on shares held for at least a minimum period will be free of tax.  The Corporate Venturing Scheme provides similar benefits for incorporated investors.  For investors wishing to buy into a pool of start-up companies, Venture Capital Trusts (these are quoted on the Stock Exchange) provide similar incentives.

For further information please contact:

john.davies@vshlaw.co.uk