Whatever your plans for obtaining finance, the important thing is to appreciate what tax relief might be available.

Whatever your plans for obtaining finance, the important thing is to appreciate what tax relief might be available and how to access them as necessary, writes Simon Paterson, partner at accountants RJP.

With the International Monetary Fund suggesting the possibility that the UK has slipped back into recession thanks to the continuing uncertainty in the Eurozone, obtaining business finance will remain difficult for the foreseeable future. 

Instability requires careful risk management and it’s important for entrepreneurs to make savings wherever possible. If you are considering additional funding or actively trying to raise money, it’s worth understanding what the most tax efficient ways to raise funds for your business are.  

1. Mortgage or loan

Taking out a mortgage – or a second mortgage – on your home and then lending the money to the business can be a cheap way of raising capital. Of course you will need to be comfortable offering your home as security against business borrowings, but in this case interest rates tend to be lower than they are for more conventional business loans. 

Some mortgages give you the flexibility to vary repayments according to your changing financial circumstances; you may be able to repay lump sums, make overpayments or underpayments, or take payment holidays. 

Although there is no mortgage interest relief in the UK you will be able to obtain tax relief on interest paid if the money is borrowed for allowable purposes such as buying a business interest. Currently, an ordinary bank loan, although more difficult to obtain than in the past, is still relatively cheap simply because the base rate is currently so low.

2. Enterprise Investment Scheme (EIS)

Your business may qualify for the Enterprise Investment Scheme (EIS) and therefore be an attractive proposition for investors seeking a tax efficient investment. Investors can claim:

– income tax relief at 30 per cent on the amount they subscribe for qualifying shares in an EIS registered company, up to a maximum investments of £500,000 each year.
– capital gains tax – free growth; and 
– the roll-over of previous gains into the acquisition cost. 

In order for your company to qualify for EIS registration it must, throughout a relevant three-year qualifying period, fulfill the following criteria:  – be an unquoted company;
– have only fully-paid issued shares;

– be a trading company carrying on a qualifying trade wholly or mainly in the UK;

– exist for genuine commercial purposes, and not be part of a scheme for the avoidance of tax; and

– not be a 51 per cent subsidiary of another company, or otherwise be under the control of another company.

3. Reserach & Development (R&D) Relief

If your business involves research and development, it may be possible to claim R&D tax relief, aimed at small and medium-sized enterprises. Whilst this applies largely to companies working in the IT field, many other companies undertake R&D and overlook the ability to claim. 

Whilst this is not strictly speaking a source of finance, it is a source of support from HMRC by the provision of tax relief in excess of the amount due in relation to the expenditure incurred. Companies can save up to an additional 26 per cent in tax for every £1 spent on R&D and from April 2012 this benefit will rise to up to 31.25 per cent.