MAH, Chartered Accountants

Category: limited company

  • Reduction of capital

    Companies may need to reduce their capital, for example to:

    • repay excess cash to shareholders
    • create distributable reserves to be able to pay dividends
    • help with a demerger or spin out of a subsidiary

    In this article we consider the following key issues:

    1. legal process
    2. accounting treatment
    3. tax treatment

    (this article is a summary only, there’s alot of rules and regulations around this that would need to be carefully considered, as well as the specific circumstances affecting a company and the intentions behind the transaction)

    1) Legal process

    Under the Companies Act 2006 s.641 a private limited company can reduce its share capital without a court order or auditors statement, but it will need a special resolution supported by a solvency statement. A plc would usually need to get a court order and auditors statement.

    Special resolution

    The special resolution will require at least 75% of shareholders to agree to the capital reduction and they must be able to see the solvency statement at the general meeting, or if voting on a written resolution it should have been sent along with the proposed resolution (s.283 & 642).

    Solvency statement

    The solvency statement needs to be made by the directors of the company and it basically confirms that the company will be able to repay its current debts and also those falling due within the next 12 months.

    To be able to make it, the directors would need to carefully review all of the company’s existing liabilities as well as contingent and prospective liabilities.

    The solvency statement should not be taken lightly as its a criminal offence to issue it without having reasonable grounds. Directors should also consider if they have adequate insurance.

    The solvency statement has to be made a maximum of 15 days before the date on which the special resolution is to be passed (s.642). So for example, if the directors make the solvency statement on 1 January 2023, holding a shareholders meeting on 31 January 2023 would be too late.

    Filing at Companies House

    The special resolution, solvency statement and also a statement of capital (form SH19) have to be registered at Companies House within 15 days of the resolution passing (s.644).

    2) Accounting treatment

    The share capital can be reduced in any way and s.641 mentions:

    Share capital includes the nominal value of the shares issued, as well as share premium and capital redemption reserve. Revaluation and merger reserves are not usually included, but it may sometimes be possible to do other transactions/adjustments first to try and use these.

    If share capital is directly reduced rather than share premium or capital redemption reserve then the shares would need to be cancelled at Companies House.

    A key issue is that if excess capital is to be repaid using a reserve, then it can only repaid if there are sufficient distributable reserves. So if a company has accumulated losses then these need to be cleared first. But if the capital is reduced and there is a payment to shareholders at the same time, then accumulated losses don’t need ot be considered.

    Paying dividends

    If the purpose of the reduction of capital is to pay dividends in future then the share capital would be reduced and profit and loss reserves would be increased.

    For example, a company has £500k share capital and £200k accumulated deficits and so cannot pay and dividends. It could reduce share capital by £300k to result in £100k profit and loss reserves which are distributable as dividends. The accounting entry would be:

    Dr share capital £300k

    Cr P&L reserves £300k

    Surplus cash

    Using the same example as above, rather than paying £100k dividends in future, the shares could be cancelled and the £300k cash could be repaid immediately, without having to create a reserve and pay dividends:

    Dr share capital £300k

    Cr cash £300k

    Demerger/spin out

    For example, a subsidiary is being spun out to raise investment on its own and the existing shareholders of the parent will be the new shareholders of the subsidiary (ie removing the parent company) and the subsidiary has a book value of £500k. A share capital reduction could be accounted for:

    Dr share capital £500k

    Cr Investment in subsidiary £500k

    3) Tax treatment

    Generally, if dividends are paid via a reserve to shareholders then they would be taxed as income. Generally, if share capital is directly repaid without a P&L reserve being created then its taxed as capital. If the amount repaid is the same as the original cost for the shareholders, then there is no capital gains tax.

    The tax treatment can get REALLY complicated! So we’ve only put a short summary here which is very generalised as there are many possible scenarios.

    See CTM15440 and CG57810 in HMRC’s manuals as a starting point.

    Example

    For example, as described in the accounting treatment section above, share capital is reduced and there is an immediate payment to the shareholders without a reserve being created.

    The reduction does not form part of the company’s realised profits and so isn’t a distribution that has been subject to corporation tax.

    The payment will normally be treated by HMRC as a repayment of share capital under TCGA92/S122 (unless its part of a demerger in which it case it may fall under TCGA92/S126 to S130 or S136)

  • Are you recession ready?

    Are you recession ready?

    Generally its quite hard to predict whether or not there will be a recession with a high degree of accuracy. For example, whilst its possible some people may have predicted the recessions after credit crisis and Covid-19, they would have been a shock to the vast majority of small and medium sized businesses. However, in 2022 there are clear signs that a recession is on the way and the Bank of England almost appears to be relying on this to bring inflation under control.

    Economic outlook

    The ONS has reported that Gross Domestic Product (GDP) grew by just 0.1% in February 2022, following 0.8% growth in January 2022. GDP then fell by 0.1% in March 2022 and 0.3% in April 2022.

    Worryingly services, production and construction were all negative in April 2022, the first time since January 2021 during the height of the pandemic.

    We won’t find out about the GDP May and June 2022 for quite some time, but early indications are that consumer confidence are at a record low.

    This is unsurprising given the impact of soaring inflation of 9.1% in May 2022, the highest in 40 years, resulting in real incomes falling for most households and the cost of living crisis.

    With interest rates also rising and likely to increase further, many consumers and also businesses can be expected to batten down the hatches by reducing discretionary spending and cutting back in general.

    In previous recessions we have seen that deals fell through because companies didn’t want to take on risk, they wanted to save cash and to basically weather the storm. Although the Covid-19 pandemic and multiple lockdowns killed off numerous businesses, some of those which survived are in a perilous state with high levels of debt and may not survive another recession.

    Preparing for a possible recession

    Although most of our clients are generally in a good position, its always good to review finances. The points below are not very complex, but mainly guard against complacency.

    Review cashflow/forecasts

    1. Review your costs such as staff, rent, overheads etc and gross profit margins and work backwards to calculate how much income is needed in the next 1 year to stay afloat:
      • established businesses will also need to make a profit to pay dividends etc
      • startups will need to review runway and cash burn
    2. Stress test these calculations, what happens if you lose some customers, or some deals in the pipeline fall through, or there are unexpected costs or investors fall through?
    3. Is there a cash shortfall? If so, how can the gap be filled?

    Financing

    1. Many established businesses run up large aged debtors balances as they don’t want to aggressively chase their customers, and they know that they will usually pay in the end. However, in times of economic uncertainty its best not to hold off too long and regularly chase customers for payment. What happens if your customer’s customer doesn’t pay them? Credit control can be done in a polite manner, without threatening court etc.
    2. Maximise your funding and check your access to loans, overdrafts and credit cards etc. It can be a good idea to have facilities on tap, in case you need them. With interest rates at a low level, the cost of financing a loan to sit in your bank during the next 1-2 years could give you peace of mind if you have a low cash balance.

    Sales and marketing

    1. Established businesses can sometimes run on autopilot, but customer behaviour has been shown to change during times of recession or economic uncertainty. Clients or customers may focus on low cost but conversely high quality/reliability/luxury etc can sometimes become more important for other customers. How can you use this to your advantage? Are there any niches or customer segments you can target?
    2. Look after your core customers, keep them happy and help their businesses and they’ll stick around/survive as customers.
    3. It may not be possible to enter a completely new market, but businesses may be able to use their skills and capacity in different ways. For example, during lockdown high quality fresh food suppliers to restaurants and hotels lost their customers, but a whole new consumer market opened up for home deliveries.

    Costs

    1. Review your staff contracts and consider how the redundancy process could work, in the worst case scenario. If you have under performing staff, put communications with them in writing about their performance and take legal advice. Its best to prepared just in case.
    2. After the pandemic, many businesses are already quite lean but there could be some projects or spending which could be delayed.
    3. Marketing spend is a tricky one, it can often take spending money to make money! Its easy to leave Adwords/Social media spending running in the background, but now is definitely a good time to review the effectiveness of marketing campaigns and check how they are performing.

  • Startup accountant

    We are startup accountants & can help you setup

    Setting up a new startup or business can be stressful with what looks like a mountain of paperwork and red tape to deal with.

    We’re here to help you with the tax and accounting side of things and have advised startups as diverse as a new hotel chain to a payments platform to fashion stores and e-commerce. We can support you with the fund raising process from seed rounds all the way through to an IPO.

    [maxbutton id=”1″ url=”https://www.mah.uk.com/prices/” text=”Get an Instant Quote” ]

    Generally speaking, if you make money from a business then you have to pay tax on your profit.

    Profit is defined for tax purposes as your sales and business income minus eligible business expenses. Most expenses incurred in running a business will save tax, but some are disallowed such as entertaining customers/suppliers with restaurants, events or gifts.

    Business structure

    Limited company

    The vast majority of our clients are limited companies because this structure can save a lot of tax and offer a lot of flexibility.

    If you want to scale and grow quickly via investment then you’ll need a limited company to issue shares to investors. You can also use a holding company to own subsidiaries if you may need to sell in future or will have different sites/sectors.

    Limited companies also provide protection against personal assets (eg house/car) if the business goes bust and can’t pay its suppliers/lenders.

    Some examples of the tax savings:

    • use a salary and dividends payment structure to avoid NIC and pay less income tax
    • you can decide how much money to take out the business and when
    • delay/defer tax using a directors loan
    • appoint family members as shareholders/directors to save tax
    • EIS/SEIS tax breaks
    • R&D tax credits

    Limited companies are required to file annual accounts and corporation tax returns, as well as file an annual confirmation statement. There is also more documentation involved to deal with shares and directors will need to file a self assessment to declare their dividends.

    Sole trader

    Sole trader registration is best for very small businesses as it involves less admin and cost.

    If you expect your profit to exceed the annual personal allowance (2019: approx £12k per year) then you’ll need to be registered with HMRC as a sole trader.

    Once your turnover exceeds £40-50k per year then it will usually be worth converting to a limited company.

    If you expect to make a loss in the first few years then sole trader status can be quite beneficial as you offset the losses against previous years employment income to get tax refunds.

    The main filing requirement is to prepare a self assessment tax return with details of income and expenses.

    VAT

    If your sales will exceed a certain threshold (£85k per year in 2019) then you have to be registered for VAT. This means you have to hand over 20% of your sales to HMRC, but you can also reclaim input VAT on expenses.

    Most of our B2C clients will therefore add 20% to their planned sales prices so that they don’t suddenly start making a loss once VAT registration kicks in or lose consumers from having to increase prices. For B2B clients its not really an issue as business customers can generally just reclaim the VAT.

    Many of our startup clients have voluntarily registered for VAT so that they can get regular refunds from HMRC for VAT paid on their expenses such as rent, software and consultancy etc.

    VAT returns and payments usually have to be made quarterly.

    Payroll

    If you hire staff then you have to setup a PAYE scheme and issue payslips to employees. You’ll also need to calculate their income tax and national insurance and pay this to HMRC every month.

    A pension scheme will also need to be setup and staff enrolled, although they can choose to opt out if they prefer.

    Most of our limited company clients will setup a PAYE, even if there are no staff, as directors can pay themselves a salary to save tax.

    Record keeping 

    As you can see above, various documents have to be filed with HMRC for accounts, self assessement and VAT etc on a regular basis.

    In order to prepare these documents we need to have the full records of the business including:

    • bank payments and receipts
    • sales
    • expenses
    • loans
    • share issues/options

    Most clients will enter the transactions into cloud software like Xero, or use our excel template. Some clients are too busy or hate bookkeeping and so we do it for them.

    Managing performance

    If the bookkeeping is done regularly then we can check how the business is performing. We can also prepare cashflow forecasts and predict how the business will do in the next year.

    This is important because the vast majority of startups fail in the first 3 years, but as we help clients to manage their performance, our clients tend to survive and thrive.

    For example, we noticed one of our clients had a lot of slow paying customers with low value invoices and helped them to setup direct debit collections to automate the process. On another client we helped them to analyse their margins and to increase prices.

    Next steps

    [maxbutton id=”1″ url=”https://www.mah.uk.com/prices/” text=”Get an Instant Quote” ]

    Please contact us for a free, no obligation consultation to discuss your requirements. Our offices are at Liverpool Street or we’re happy to have a phone/email discussion.

  • EMI Schemes (Enterprise Management Incentive)

    EMI schemes (Enterprise Management Incentives) are tax advantaged schemes offered by H M Revenue & Customs to small and medium sized businesses (“SME”) for incentivising the SME’s employees.

    EMI schemes are share option schemes which fundamentally provide tax savings for both the employee and the SME whilst also providing the facility for the SME to incentivise and reward its employees.

    EMI Scheme

    Current perception of EMI schemes

    It is a common misconception that EMI schemes are complicated and EXPENSIVE! This is not the case.

    Whilst the set-up of the scheme may cost a certain amount of money, the tax advantages achieved can far outweigh the scheme’s implementation costs.

    It is true that the rules surrounding EMI schemes are detailed and may be viewed as complicated. However, the government has put in place such rules so that the maximum number of SMEs and employees can benefit from the available tax advantages and, in turn, incentivise SMEs and employees for commercial progression.

    Advantages of using an EMI scheme

    The employee will not be subject to any PAYE or NIC on acquisition of shares when he/she exercises the share options. The only times PAYE/NIC may be payable are if the share options were granted at a discounted value or if the share options are exercised after a disqualifying event.

    In comparison to a simple reward of shares (which triggers a PAYE/NIC liability on acquisition or vesting), the EMI scheme provides a tax free environment of growth so that the employee can benefit from a tax free uplift in value of his/her shareholding.

    The company also benefits from a Corporation tax saving on the value of the shares passed to the employee when the share options are exercised. It is therefore a win-win situation for both the employer and employee.

    If the employee sells his/her shareholding then there may be a Capital Gains Tax liability that arises. However, being in an EMI scheme also enables the employee to take advantage of Entrepreneurs’ Relief. Entrepreneurs’ Relief means that the employee will only pay tax at 10% on the gains made from selling the shares.

    Certain conditions of the EMI share option scheme

    Employees: generally only those employees who work for 25 hours or more per week are eligible for EMI options.

    Employee: the total market value of an employee’s unexercised share options cannot exceed £250,000 at any given time.

    Company: the total market value of all unexercised EMI share options cannot exceed £3m at any given time.

    Company: the SME must not be under the control of another company.

    Company: the company must have Gross Assets of less that £30m.

    Company: it must have fewer than 250 full time employees.

    Company: it must be carrying out a qualifying trade as its main purpose.

    Shares: the shares subject to the EMI option plan should be ordinary, non-redeemable, and fully paid up shares.

    Grant: the options must be granted for bona-fide commercial reasons and not to avoid tax.

    Process

    The process to get an EMI scheme set up for an SME starts with understanding a client’s needs and what outcome is sought. Once this has been established, we can start structuring the EMI scheme which entails communicating with H M Revenue & Customs and putting in place required share option agreements with the relevant employees.

    Communication with H M Revenue & Customs is for approval of scheme qualification as well as obtaining their agreement to the company’s share valuation. The most advantageous valuation is always sought for the client company.

    Once the above are in place, the company is in a position to grant the share options to its employees. These grants should then be notified to H M Revenue & Customs within 92 days in order to preserve the related tax advantages.

    Annual filings with HMRC are also required for an EMI scheme so that HMRC can be kept informed of the scheme’s activities.

    Further information

    HMRC’s website also provides brief details on the benefits of using an EMI scheme.

    Where can MAH help?

    We can provide you with a free, no obligation consultation for initial advice on the EMI scheme and can demonstrate how it may be beneficial for your company. There are both, financial and non-financial benefits for offering employee incentives under the EMI scheme.

    To book your consultation with our tax specialist Prashant Malde, please contact us.

  • Confirmation Statement

    How to complete the Confirmation Statement

    The Confirmation Statement is required to be filed at Companies House at least annually, normally on the anniversary of incorporation.

    However, we often have to bring it forward or file an extra one if there is investment or changes to shareholder/director details and this is required to be updated at Companies House by investors or a bank etc.

    It costs £13 to file online (or £4o via the more complex paper route) and is generally straightforward to prepare.

    Online

    Login using your webfiling account. Next enter the company’s registration number and also the company’s authentication code. If this is not available, it can be requested at this stage online and Companies House will post it within a few days to the registered office address.

    General details

    The directors’ and company’s details need to be checked and updated if necessary, typically these may be any changes to registered, home or correspondence addresses.

    Shares

    If SH01s and SH02s have been filed online, then the share capital is generally upto date, but the share capital should be doublechecked against expectations, in case any SH01s or SH02s have not yet been filed.

    SIC code

    If it is the first Confirmation Statement to be prepared then an industry code has to be selected. The easiest way is to use a code of another client, however there is a full list at https://www.gov.uk/government/publications/standard-industrial-classification-of-economic-activities-sic

    although not all the codes may be available at Companies House.

    Persons with Significant Control (PSCs)

    A PSC is an individual or a company who can influence the company directly or indirectly.

    If completing this for the first time, ensure that you doublecheck the personal/company details of the PSC

    Many of our small clients only have 1 or 2 shareholders and typical details are shown below:

    1) If there is only 1 shareholder, they will have:

    • > 75% control and voting rights
    • the right to appoint or remove a majority of board members

    2) If there are 2 shareholders with 50:50 control:

    • >25% but below <50% control and voting rights

    Other boxes don’t usually need to be ticked for most small companies.

    Paper return

    The paper return is more complicated and time consuming and should be avoided wherever possible and is normally only required when the client doesn’t have their authentication code.

    You should ensure that all director/shareholder/company details are doublechecked to source documentation to avoid errors.

    Part 1: The statement is only 2 pages: make sure you check the company name and number and confirmation date to Companies House

    Part 2: There are many continuation pages and so the pdf is very long, but we only need to prepare the following sections:

    A1: find the SIC code (see above)

    B1: most companies only have 1 class of ordinary shares, but some may have more. In this case check to the Register of Members or share cap table. Ensure that the correct number of shares is used, and aggregate nominal value = number of shares x nominal value per share. Ensure that the total is completed for each currency table used and that a grand total is put at the bottom of the page. The amount unpaid is usually £0

    B2: the prescribed particulars can be found in the incorporation documents or in previous SH01 forms or share issue documentation

    C1: usually “No”

    D1: Enter the shareholders details and ensure this agrees to the Register of Members or Share Cap Table.

    F1-F4: Enter the PSC details (see above) or use the next part for company details.

    Don’t need all the continuation pages.

     

    Need help?

    Please do contact us if you need any help to file the Confirmation Statement

  • Public sector contractors

    Public sector

    This post only applies to off payroll “contractors” (including locums or consultants etc) who are working in the public sector, such as for the NHS, a government agency, university or local authority and use a limited company to raise invoices.

    Contractors working in the private sector will not currently be affected by these rules, although there could potentially be a risk of similar legislation in the future for the private sector.

    Old IR35 rules

    The old IR35 rules are explained in detail here, but basically if a contractor can demonstrate that they are not a “shadow employee” because they have rights of control over how/when they work, rights of substitution and no mutual obligations then they can raise an invoice via a limited company and avoid payroll taxes.

    Under the old rules it was up to the contractor to decide if they were inside or outside of IR35, and so they could use their judgement or obtain professional advice about this. If HMRC disagreed with the contractor and believed that they were inside IR35, then the liability for unpaid salary taxes was on the contractor.

    New IR35 rules from 6 April 2017

    If the new rules are found to apply, then contractors will have to pay employment taxes similar to those paid via payroll/PAYE, even if they are using a limited company.

    Under the new rules, it is up to the public sector body to decide if the contractor is inside or outside of IR35.

    If the public sector body is later found to have made an incorrect decision then they will be held liable for the unpaid salary tax/NIC. Therefore, it will be less risky for public bodies to apply a blanket rule of paying all contractors as employees and deducting tax/NIC, rather than verifying whether each and every single contractor is outside IR35 and paying the full invoice amount.

    Our understanding is that the NHS and locum agencies will be generally by paying all doctors and nurses via PAYE under the new rules. IT and other consultants may also be caught by the NHS or other public bodies.

    Impact of new IR35 rules for public sector contractors

    The fee payer (eg NHS or agency) will calculate income tax and employee NIC and deduct these from the fee payable to the contractor. The contractor’s limited company will get a tax deduction for the income tax and NIC, but will then have to pay a further 20% corporation tax on the profit.

    However, if all the public sector net income is withdrawn as salaries then there will not be any profit left and this is exempt from income tax/NIC as it has already been deducted at source.

    The 5% allowance normally available to contractors inside IR35 is also removed for public sector contracts.

    Overall, we CANNOT see any significant benefits from using a limited company if a contractor will be caught by the new rules. The normal tax planning using dividends or multiple shareholders will be affected by the extra corporation tax that is payable on top of income tax/NIC unless all net income is withdrawn as salaries.

    In this case, the contractor would be better off being employed directly via the agency/NHS without the limited company. The limited company can also be closed down.

  • Setting up company structure

    Factors involved in setting up company structure

    There are different factors involved in setting up company structure and it depends on the type of business, circumstances of the shareholders and their aims for the business.

     

    Shareholders:

    • if you may sell the company and re-invest the profits a holding company may be useful
    • otherwise, the co-founders can be the shareholders
    • for contractors and family owned businesses, husband/wife can be shareholders to maximise dividends
    • ambitious startups looking to grow should setup a share cap table
    • leave an option pool for key staff
    • eg 2 co-founders setup a company owning 45% each and leave 10% option pool

    Multiple trades:

    Clients often have more than 1 business. The simple and efficient solution is to have 1 company and run the different businesses as divisions of this company.

    For tax purposes, the different trades need to have separate profit and loss calculations. This is because losses from a trade can be set against the profits from another trade in the same year. But if losses are carried forward against future profits they can only be used against profits from the same trade.

    If you’ll be expecting to sell a business/trade, it can be hived out into a separate company before sale. If its held for at least 1 year before sale, then there is no tax due to Substantial Shareholding Exemption.

    Sometimes its better to start off with a group structure, so 1 holding company and 3 subsidiaries for the different businesses/trades, although this can also be achieved later on.

    Dividends:

    Profits after tax can be given to shareholders, and this is normally the most tax efficient way to extract profits.

    Dividends have to be paid according to shareholding. So if a husband and wife hold 50% each, they have to receive equal dividends. Sometimes, it may make sense for 1 spouse to hold 100% shares and shares can be transferred between spouses without tax at any time (with the right paperwork) to maximise differences in tax rates and allowances.

    If you’ll be receiving investment, the investors will also be able to receive dividends. So if you have a separate side business operating out of the same company, it will normally be better to hive this out before receiving investment.

    Need help?

    If you need more help on setting up company structure then please contact us for a free consultation.

  • Xero Accountants

    Xero Accountants

    We are certified as Xero Accountants

    xero-certified-advisor-logo-hires-RGB

    As Xero accountants we specialise in tech startups but also have experience of many other types of businesses from creative agencies to contractors to restaurants.

    What is Xero?

    Xero makes it very easy for businesses to do their bookkeeping, for example by automatically feeding in transactions from your bank and using plugins to connect with your business.

    Tax

    We can review what you’ve done in the cloud as your Xero accountants and provide expert tax and VAT advice to make sure that:

    1) everything is in compliance with tax legislation
    2) tax savings are made wherever possible

    Business advice

    Xero also has lots of great charts and reports and we’ll run through your business with you to analyse your performance and discuss how you can grow or face challenges.

    Save 15%

    Did you know that Xero offers a discount on all cloud accounting packages signed up by Xero accountants? We pass on those savings to our clients whilst many other firms keep the discount to boost their own profits.

    Our fees start from £50/mth + VAT for dealing with accounts and corporation tax (excluding the Xero fee) for simple startups.

    Contact us

    Please contact us for a free, no obligation consultation to discuss your requirements and to setup or switch your Xero account. Our base at Liverpool Street is just a short walk away from Silicon Roundabout.

     

  • Pre trading expenses

    Pre trading expenses: summary

    You can get a tax deduction for pre trading expenses incurred upto 7 years before your business started trading.

    Pre-trading

    Under CTA2009 s.61, if a company incurs expenses for the purposes of a trade before (but not more than 7 years before) the date on which the company starts to carry on the trade and a deduction would be allowed for them if they were incurred on the start date, then the expenses are treated as if they were incurred on the start date (and therefore a deduction is allowed for them).

    Pre-incorporation

    Note that CTA2009 s.61 mentioned above relates to pre trading expenses incurred by the company. If a company doesn’t yet exist, how can it buy goods or services?

    There could be a risk that this legislation technically may not apply to pre-incorporation expenditure, as this has been incurred by a person who is intending to incorporate.

    However, a pre-incorporation contract could potentially be used which states that the founder/director will be acquiring fixed assets and incurring expenses on behalf of a new company yet to be incorporated, not on behalf of themselves.

    This would then need to have been ratified after incorporation, in accordance with Companies Act 2006 s.51 “A contract that purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly.“ (this legislation normally applies to contracts with external parties, but should be relevant to this context).

    When does “Trading” start?

    Just in case you’re interested in the details behind commencement of trading or tax periods:

    Under CTA2009 s.9 (1) an accounting period of a company begins when the company comes within the charge to corporation tax.

    S.9(2) also mentions a company is treated as coming within the charge to corporation tax when it starts to carry on business.

    Therefore, if a startup has not started to carry on its business by the end of its accounting year, it would not have come within the charge to corporation tax, and therefore there would not be any accounting period for corporation tax purposes.

    BIM70505 provides guidance that the House of Lords judgements in Ransom v Higgs [1974] 50TC1 stress the active nature of trading – the need to be providing goods or services, to be trading with someone.

    The courts have distinguished between preparing to commence business and actually commencing business. As a general rule a trade cannot commence until the trader:
    – is in a position to provide those goods or services which it is, or will be, his or her trade to provide, and
    – does so, or offers to do so, by way of trade.

  • Startup equity, dilution and cap table

    Startup equity, dilution and cap table

    If you’re raising funding or startup equity you need to work out how many shares to issue to investors. The easiest way is probably to work out the % holdings after the share issue and work backwards.

    For example, if there are 2 co-founders with 100 shares each who are raising £100k and the investor will get 10%, you might think that the investor will get 20 shares (10% of 200 total shares), however this would give them 9% as there would be 220 shares in issue.

    The investor would need to receive 22 shares, as this would give them 22/222=10%. This would also dilute the co-founders down to 100/222=45% each.

    Take a look at our template for a share capital table and play around with the figures to see how it works:

    Share capital table

    Share options / option pool

    We’ve also included an option pool for share options to be granted to key staff or even advisors. Share options are contracts which specify that the option holder can purchase shares at a specified price if certain conditions are met, for example 1 tranche of options could vest every quarter, whilst another tranche only vests if performance conditions are met.

    Need help?

    Please get in touch if you need any help with any of the following:

    – getting your house in order prior to receiving investment

    – calculating number of shares to be issued to investors or option pool

    – preparing board minutes, shareholder resolutions, investor offer letters and Companies House forms for share issues

    – tax advice for EMI share options or SEIS/EIS tax relief for investors.

    However, we highly recommend using a lawyer to draft or check the shareholders agreement or subscription document to ensure that co-founders’ rights are protected as much as possible.