Five tax breaks SMEs can benefit from in the UK

Paul Robbins of Croner-i illustrates five tax breaks available to small to medium-sized enterprises in the UK that could reduce the tax bills of many SMEs and their owners.

What tax breaks are available to SMEs in the UK?

A surprising number of small to medium-sized enterprises (SMEs) in the UK are not taking advantage of HMRC approved or endorsed tax breaks that, if implemented correctly, could save them a lot of money. With that in mind, here are five valuable tax breaks that could reduce the tax bills of many SMEs and its owners:

Employment Allowance
Research & Development tax reliefs
Tax-favoured investment schemes
Enterprise Management Incentives
Entrepreneur’s Relief

1. Employment Allowance

As an SME, you could get up to £3,000 a year off your National Insurance bill with the help of the Employment Allowance.

If you’re a business paying employer’s Class 1 National Insurance, you can claim Employment Allowance any time in the tax year. The simplest way to make a claim is through your payroll software. Simply write ‘Yes’ in the ‘Employment Allowance indicator’ field next time you send an employment payment summary (EPS) to HM Revenue and Customs (HMRC).

Some restrictions do apply for single director companies where the single director is the single employee, for example, so check that you qualify before making a claim. It should also be noted that as of 6 April 2020, you’ll only be able to claim Employment Allowance if your Class 1 NIC liability did not exceed £100,000 in the preceding tax year.

2. Research & Development (R&D) tax credits

A further government incentive designed to reward UK companies for investing in innovation is Research & Development (R&D) tax credits. Investing in R&D either reduces your tax bill by allowing a greater reduction than the amount expended or, if you cannot claim the relief, you can obtain a cash payment from HMRC. This can provide a source of funding for companies to invest where required.

The HMRC R&D criteria are deliberately broad, allowing companies of all sizes and sectors to qualify should they take a risk by attempting to ‘resolve scientific or technological uncertainties.’ Such a risk could involve the undertaking of:

creating new products, processes or services
changing or modifying an existing product, process or service

SMEs can gain a total tax saving of £43.70 for every £100 spent on R&D (£100 x 230% x 19). For 2017/18, the total amount claimed by SMEs was approximately £2.3 billion.

3. Tax-favoured investment schemes

The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) represent an excellent selling point for any SME attracting investment, but not as many are taking advantage of it as they could. The rules to both can be complicated but you can get advanced assurances from HMRC.

Seed Enterprise Investment Scheme (SEIS)

The SEIS helps younger and higher-risk businesses raise finance by offering generous tax reliefs to investors. It started in 2012 and is designed to support the early stage businesses, which would typically be viewed as too high a risk for all but the most enterprising of investors.

If the company has no more than 25 employees and gross assets of up to £200,000, it could qualify. The SEIS offers many tax reliefs to investors, ranging from income tax relief of 50 per cent of the amount invested and exemption from CGT on gains on shares.

Enterprise Investment Scheme (EIS)

The EIS works in a similar way to the SEIS scheme. EIS offers 30 per cent tax relief on anything investors invest and holds for three years. After that time, they are exempt from Capital Gain Tax (CGT).

Investors can invest up to a maximum of £2 million, but not more than £1 million can be subscribed for shares that are not shares in a knowledge-intensive company. To qualify, the company must meet several conditions, including that it has less than £15 million of gross assets. The claim can be made on the self-assessment tax return for the tax year in which the shares were issued.

4. Enterprise Management Incentives (EMIs)

Independent companies with gross assets of less than £30 million and fewer than 250 full-time employers can offer Enterprise Management Incentives (EMIs) to their employees.

This tax incentivised employee reward scheme, which uses share options, is designed for small and medium sized companies. A company can select employees and give them the options of acquiring shares over a prescribed period, subject to qualifying conditions being met ie having a permanent UK establishment etc.

5. Entrepreneur’s Relief (ER)

If you are selling a business, ER means you can pay less CGT when you sell your company, or on the disposal of certain business assets and shares. ER reduces the rate of tax from 20 per cent to 10 per cent and is subject to a lifetime cap of £10 million per individual.

It should be noted that there are many requirements which need to apply. For example, to qualify for relief if you’re selling all or part of your business, both of the following must apply for at least 2 years up to the date you sell your business:

you’re a sole trader or business partner
you’ve owned the business for at least 2 years

If you’re selling shares or securities, closing your business or selling assets you lent to the business, various other conditions apply.

It has also been rumoured that significant changes may be made to ER in the Budget this year, or that it could be abolished all together. Therefore it’s best to seek professional advice and look at alternatives before making any decisions.

About the author

Paul Robbins is Tax Content and Innovation Manager at Croner-i, who specialise in tax & accounting, human resource, and health & safety.

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Employment Allowance (GOV.uk)

Claiming Research and Development tax reliefs (GOV.uk)

Enterprise Investment Scheme (EIS) (GOV.uk)

Seed Enterprise Investment Scheme (SEIS) (GOV.uk)

Tax and Employee Share Schemes (GOV.uk)

Entrepreneurs' Relief (GOV.uk)