Budget analysis: the key points for small business

1. Enterprise management incentives (EMI)

The EMI rules allow companies to grant tax advantaged share options to their employees. The chancellor announced an increase in the value of EMI options that can be held by an employee from £120,000 to £250,000. The limit is determined by reference to the unrestricted market value of the shares held under option at the date the option was granted.

As EU approval is required for this change, it will come into effect "at the earliest opportunity".

2. Entrepreneurs relief and EMI options

Because the rules for entrepreneurs relief require shares to be held for a period of one year before sale, it has been difficult for option holders to benefit from entrepreneurs relief on the sale of shares even though they have held an option over the shares for over a year. Entrepreneurs relief provides for a 10% rate of capital gains tax on the first £10m of gains.

The budget disclosed that the EMI rules are to be amended (subject to EU approval), so that gains made on shares acquired by exercising EMI options on or after 6 April 2012 will be eligible for entrepreneurs relief.

At this stage the rules have not been announced but this is a very welcome change, which removes a major disadvantage of EMI options.

3. Corporation tax rates

The main rate of corporation tax is being cut again. It will be reduced to 24% from April 2012 (rather than 25%) and to 22% by April 2014. The small companies rate remains at 20%.

4. Research and development (R&D) tax credits

The chancellor has announced an 'above the line' credit for R&D, with a minimum rate of 9.1% before tax. Loss-making companies will be able to claim a cash refund. A consultation on the detailed design of the credit will take place shortly and final details will be decided following consultation. The credit will be introduced from April 2013.

As previously announced, the R&D tax credit relief available to small and medium-sized companies will increase from April 2012 to 225%.

5. Enterprise investment scheme (EIS) and venture capital trust (VCT) relief

Unfortunately the government has restricted the maximum annual amount that can be invested in a single company to £5m, and not the £10m as had previously been announced. The £5m will now be a general limit for EIS and VCT investment into a single company from 6 April 2012 (although this remains subject to EU approval).

On a positive note, the type of shares that are eligible for relief will be widened and the £500 minimum investment limit is to be removed. In addition, the £1m limit on investment by a VCT in a single company is to be removed and the thresholds for the maximum size of qualifying company for both EIS and VCTs are to be increased.

6. Intellectual property: patent box

As previously announced in November 2010, the government will introduce a reduced 10 per cent rate of corporation tax for profits attributed to patents and certain other similar types of intellectual property. This will be introduced over five years from 1 April 2013 and forms part of the government's 'growth agenda'. In the first year this proportion will be 60 per cent and increase annually to 100 per cent from April 2017.

7. Corporation tax reliefs for the creative sector

The chancellor drew on the success of the film sector and following industry consultations will introduce corporation tax reliefs for the video games, animation and high-end television industries from April 2013, subject to state aid approval.

8. Seed enterprise investment scheme (SEIS)

SEIS will provide income tax relief at 50% for individuals who invest in shares in qualifying companies, with an annual investment limit for individuals of £100,000. Capital gains tax will not be payable on gains realised upon a disposal of the shares after three years and the government has included a capital gains tax holiday for gains realised on the disposal of an asset in 2012-13 and invested through SEIS in the same year.

The scheme will apply to companies whose total assets are below £200,000 and have fewer than 25 employees with the maximum amount that a company can receive capped at £150,000. Following consultation, a number of changes have been made to the published draft legislation, which will result in a wider number of companies and investors qualifying for the relief. While this is encouraging, published draft legislation remains complex in respect of the size of the company which will be seeking investment.

Jeffreys Henry LLP is a leading firm of chartered accountants and business advisors in London. For more information visit www.jeffreyshenry.com.


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