Building a startup in the UK can be daunting, especially when it comes to raising capital. You need money to grow your team, improve marketing and enhance the customer experience. But, the good news is that there are many funding options and ways to attract potential investors available to businesses in the UK.
Not only that, by choosing the right kind of funding, you can save money and set your business up for success. So do not let your fears hold you back, take the time to learn about the different types of startup business grants available in the UK and make informed decisions. But first:
Draft a business plan
First things first – create a business plan when starting out because that will serve as a roadmap for your company, outlining your goals and forecasting your revenues. Preparing a business plan if you need financing is imperative, as external investors and financial institutions will want to see it before deciding whether to lend you money.
Developing a business plan also forces you to evaluate your idea and assess its chances of success thoroughly. You can identify any potential flaws and consider your company’s potential early on. Therefore, pay attention to this crucial step – a well-funded and budgeted business is more likely to succeed than one that is not.
How to get funding for a new business
Carefully consider your funding options to choose the right strategy that meets your business requirements. Many financial resources are available including using your own money, borrowing from friends and family, getting a bank loan, finding outside investors, borrowing from other commercial lenders, or applying for a grant.
It is essential to think about the tax consequences of each option, and seeking professional guidance can be helpful as you search for the best way to finance your small business. Bradleys Accountants can help in this regard. Following are some of the popular small business grants in the UK:
1. Attract investment under the Seed Enterprise Investment Scheme (SEIS)
SEIS can help you raise money by offering tax relief to investors. These investments are limited to £150,000 and are only available to companies less than two years old, have fewer than 25 full-time equivalent employees, and have assets worth less than £200,000.
Your small business must also be based in the UK, carry out a qualifying trade, and not be listed on a stock exchange or controlled by another company.
2. Benefit from the Enterprise Investment Scheme (EIS)
EIS is one of the four venture capital programs designed to help smaller, high-risk businesses raise capital by offering various tax reliefs to investors. Companies can raise up to £5 million annually (and a total of £12 million throughout their existence).
To qualify for the EIS program, your small business must maintain a permanent presence in the UK, not be listed on a recognised stock exchange, not control any other companies (except for qualifying subsidiaries), and not be controlled by another company or have more than 50% of its shares held by another company.
The business must also engage in a qualifying trade and have fewer than 250 full-time equivalent employees and assets worth less than £15 million before the shares are issued and no more than £16 million after.
3. Attract investment from Venture Capital Trust (VCT)
The VCT programme was established to assist smaller, higher-risk businesses that cannot list their shares on a recognised stock exchange, in raising capital.
To attract VCT investment, your company must fulfil requirements regarding its trading activities, gross assets, independence, and subsidiaries.
The business must have fewer than 250 employees and gross assets under £15 million, and less than seven years must have passed since its first commercial sale when the investment is received. Your business must also:
- Perform a qualifying trade
- Not be controlled by another company
- Maintain a permanent presence in the UK
- Intend to use the investment for a permissible trade
- Not be listed at the time of the investment on a recognised stock exchange
The highest limit to be raised yearly is £5 million, with a lifetime investment cap of £12 million from venture schemes.
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Besides securing funds for your startup, you must make sure you effectively manage your tax liability. Here are a few tax savings tips your growing business can always rely on:
1. Secure tax relief on loans for a close company
A close company is a limited company with five or fewer shareholders. You could be eligible for tax relief on the interest paid on a loan taken out to purchase ordinary shares in a close company or to lend money to a close company. To qualify for this relief, you must either:
- Own at least 5% of the company’s shares (either alone or in partnership with others)
- Spend most of your time working and managing the company or an associated company and own some shares (although you do not need to own 5%).
Please note there is an annual cap on various income tax reliefs, which is greater than 25% of income or £50,000. This cap applies to various reliefs, such as relief for loss and relief for qualified loan interest.
2. Obtain tax relief on the interest for borrowing money to purchase partnership assets
If the machinery or equipment you purchase is eligible for capital allowances, you can get tax relief on the funds you borrow to buy it. This means that it might be worth borrowing money to purchase equipment and use your savings for other purposes to maximise the tax relief you can receive.
However, please remember that the amount of some income tax reliefs, including relief for qualifying loan interest and loss reliefs, is limited to either £50,000 or 25% of your earnings per year, whichever is greater. So the financial rewards may be smaller.
3. Get tax relief for business borrowings
If your loan is used solely for business purposes, its interest can be deducted as a business expense. Loan-related costs, such as arrangement fees, are also deductible. The deduction for loan interest and finance costs is limited to £500 for businesses that use the cash basis for their accounts.
Therefore, unincorporated businesses with significant borrowings may prefer to prepare their financial statements using the accruals basis to avoid this cap.
When your business needs additional capital, borrowing may be a tax-advantageous option because the associated costs, such as arrangement fees and interest, can be deducted. This reduces the overall cost of borrowing.
4. Watch out for the return of funds trap
This is one of the most critical tax planning tips. Borrowing funds from a close company may be eligible for relief, but relief will not be granted if the borrower returns the money. Be cautious of this trap when it comes to returning funds.
Over to you
Raising capital and saving on taxes for any business – large or small – can be a minefield. We hope the blog has given you a good idea regarding how your company can approach startup business grants in the UK and also save taxes. Before you make any decisions, ensure you receive detailed financial advice. But if you are working with an accountant, this activity can be very smooth. So why waste time when you contact Bradleys Accountants today!
