Available Incentives for Setting Up a UK Business

The UK can be an attractive place to launch a business as there are a variety of tax incentives and grants available for new or innovative startups. Startups are inherently risky as they have yet to prove their value. Likewise, finding investors willing to put money into a high-risk business can be challenging. Fortunately, the UK government has established several tax incentives to encourage investors to put their funds into high-risk startups. We explain available incentives for setting up a business in the UK. 

Enterprise Investment Scheme (EIS)

The EIS scheme allows qualifying investors who are tax resident in the UK to reduce their income tax bill by 30% of the amount they invest in an eligible startup. 

Both the investor and the company issuing the shares must meet various criteria for EIS relief to apply. In particular, the investor:

• cannot be an employee or a paid director of the company; and 
• must hold less than 30% of the company. 

Likewise, the company issuing the shares must:

• have a permanent UK establishment; 
• be less than 7 years old from the date of its first commercial sale;
• have fewer than 250 full-time employees; and 
• the value of the company’s gross assets must not exceed £15 million (on a group-wide basis).

Companies can raise £5 million each year in investment, which qualifies for tax relief such as EIS. This threshold also includes SEIS and VCT investment. Companies also have a lifetime limit of £12 million. These limits increase to £10 million and £20 million, respectively, for knowledge-intensive companies. 

Seed Enterprise Investment Scheme (SEIS)

The SEIS scheme is similar to EIS but is designed for even earlier-stage companies, with the following criteria:

• the company issuing the shares must be trading for less than three years; 
• fewer than 25 full-time employees; and 
• gross assets of no more than £350,000. 

Typically, investors view these smaller businesses as higher risk than the slightly more advanced EIS-qualifying companies. Accordingly, the income tax relief is even more generous. The SEIS scheme allows qualifying investors who are tax residents in the UK to reduce their income tax bill by 50% of the amount they invest in an eligible startup. 

Companies can raise up to £250,000 through SEIS investments. If a company qualifies for SEIS relief as well as EIS relief, it should maximise its SEIS-qualifying investments before issuing EIS shares.

Business Asset Disposal Relief

Business Asset Disposal Relief is an additional relief for all UK companies, not just startups. It encourages entrepreneurship by incentivising individuals to manage and own their own companies.

To qualify, an individual must:

• be an employee or director of a trading company; and
• hold at least 5% of the company’s share capital for at least 2 years. This share capital must entitle the individual to 5% of the voting rights, dividends and proceeds on a sale. 

If an individual satisfies the above, their CGT tax rate is reduced to 10% when they sell those shares, up to a lifetime limit of £1 million. 

Employees who are issued their shares through an EMI option scheme can count the time that they held their options in the 2-year time limit and can qualify for this relief even if they hold less than 5% of the share capital after exercising their options. EMI is a tax-efficient scheme to issue employees with options to acquire shares. 

Research & Development (R&D) Tax Credits

UK companies can also access R&D tax relief for eligible R&D activities that make an advance in science or technology. There are two different schemes, one for SMEs and one for larger companies. Notably, a company can only apply for these tax reliefs against corporation tax, so they are only relevant for companies (not partnerships or individuals). 

There are several criteria for a company to qualify for either of the R&D reliefs. If your company satisfies the test to be a SME, you can deduct up to 186% of qualifying revenue expenditure in the relevant accounting period.

The R&D rules are fairly complex. Fortunately, HMRC offers an advance assurance process for smaller companies with less than £2 million in turnover and fewer than 50 employees. You must not have previously claimed R&D relief to confirm whether you are conducting qualifying R&D.

Dividends

The dividend regime in the UK is very attractive for corporate groups with overseas entities. No tax is payable on most dividends received by a UK company, and there is no withholding tax on dividends paid from a UK company to an overseas parent. 

Grants

In addition to favourable tax treatment, there are over a thousand different types of government funding and private programs available to UK businesses. 

Local councils typically provide government funding. Ultimately, which grants you can apply for will depend on where in the UK your business is located. 

Private funding can be in the form of an accelerator, which provides support to entrepreneurs and access to funding.

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Key Takeaways

There are various tax incentives and grants available for new or innovative startups looking to set up a business in the UK. Popular options include the following:

• Enterprise Investment Scheme;
• Seed Enterprise Investment Scheme;
• Business Asset Disposal Relief;
• Research & Development Tax Credits;
• dividends; and
• grants.

For more information on available incentives for setting up a UK business, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.