Corporate Tax Considerations to Maximise Cash and Retain Employees

05 October 2020

The past few months have been very challenging for the majority of businesses, large and small.  Not just locally or nationally, but on an international basis, requiring owners, managers and directors to juggle various important factors such as staffing levels, financing options and cashflow implications, let alone the issues and changes arising in everyone’s personal lives.    

However, there are some regimes, aside from the grants being offered by the government, that may be beneficial to companies to generate cashflow and assist with employee retention.    

Increasing Cashflow 

Corporation Tax Losses  

Many UK  businesses are unlikely to  be ‘in the green’ for the accounting year in which lockdown has occurred.   

Where losses  have arisen in this period, these losses should be able to be carried back to the previous taxable period to offset against any taxed profits. This can create a cash repayment for the company or create a credit for offset against the company’s current outstanding tax balances.  

Additionally, should the company be involved in Research & Development (R&D) activity,  its qualifying  R&D expenditure  can be enhanced to reduce tax balances with any losses available for surrender in return for a cash repayment subject to meeting qualifying conditions.   

Corporation Tax  returns should be filed as soon as possible once the accounting period has ended to secure possible repayments of tax quickly.   

Enterprise Investment Scheme (“EIS”)  

The EIS and Seed EIS (SEIS)offer very attractive tax advantages to individuals who wish to invest in shares of an EIS, or SEIS, qualifying company, such as up to 50% Income Tax relief of their investment value. This in turn allows young entrepreneurial UK companies to raise growth capital in order to facilitate expansion plans. 

EIS and SEIS are targeted at start-up or growth companies and require certain complex criteria to be met to be in order that the Company and the investment satisfy the strict criteria.  We recommend that specialist tax advice is sought to confirm eligibility.  

Retaining Employees 

Employee Incentives 

Employees are fundamental to the success of any organisation and attracting and retaining key individuals can be challenging. More than any process or procedure, people create value in business.  Therefore, the creation of motivation and drive in these challenging economic times can be an important ingredient in the quest for a profitable recovery.  

Increasing salaries and making bonus payments are two of the simplest ways to incentivise staff. However, with tighter cash flows and budget cuts, this can be difficult to achieve.  As a result share based incentive arrangements can provide the solution to securing motivated and loyal staff.   

Furthermore, with  Covid depressing the value of many companies, these depressed share prices can reduce the tax costs of establishing share incentives, making it a worthwhile time to consider introducing an employee share incentives more appealing. The most popular is the Enterprise Management Incentive (‘EMI’) Share Option Scheme.  

EMI remains the most popular employee share reward given the favourable tax treatment for the recipient: 

  • No Income Tax on grant or exercise of the option, unless it is granted at a discount 
  • Capital Gains Tax, normally at 10% due to Business Asset Disposal Relief, on the sale of shares   

This provides a tax benefit for the employee while the employer has flexibility to align the criteria to deliver each employee’s incentive to the company’s strategic objectives.  Other than fees for establishing the share incentive scheme, there is no cash outlay for the Company, but employees are more meaningfully aligned to the success of the business.    

An EMI scheme normally also provides the issuing corporate a significant tax deduction where EMI options are exercised.  

At AAB we have extensive knowledge and expertise to help you through these troubling times. If you would like to discuss this further, please contact Kevin Meaney, Corporate Tax Partner, or your usual AAB contact.

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