Scaling up a business – understanding the tax considerations

As companies grow, new tax provisions take effect, and others change or fall away. Here, we consider some of the provisions we most regularly see impacting scaling companies.

Starting small

The first likely milestone in any business growth story is where taxable profit exceeds £50,000 for the first time - the small profits rate of 19% starts to taper toward the main rate of Corporation Tax of 25% which starts at £250,000. The VAT registration threshold is passed when annual turnover hits £90,000.

Quarterly Instalment Payments (QIPs)

Companies start to be defined as “large” for tax payment purposes when their annual taxable profits exceed £1.5 million. You must then pay your corporation tax in four quarterly instalments, all prior to the usual ‘9 month’ payment date. Companies are termed “very large” when annual profits exceed £20 million and must pay four months earlier than large companies (all 4 instalments falling within the relevant accounting period).

These limits must be divided by the number of associated companies (one company is associated with another if one company controls the other, or both companies are controlled by the same persons). Therefore, for growing groups, this can make the limits relatively modest. Limits must also be pro-rated for short accounting periods.

If your company is scaling, both in terms of profits and the number of entities, this can accelerate your corporation tax payments, making robust forecasting important to mitigate interest on late or underpaid tax instalments.

The Enterprise Investment Scheme (EIS)

EIS helps early-stage unquoted trading companies raise finance through equity by offering tax-advantaged shares to investors. It targets higher-risk early-stage businesses, encouraging venture capital investment to drive growth. Key criteria include:

Fewer than 250 full-time equivalent employees
Gross assets of £15 million or less before and £16 million or less after the share issue
Trading for no more than seven years from the first commercial sale
Must be a qualifying trade

Tax incentives for investors include:

Income Tax relief up to 30%
Exemption from Capital Gains Tax (CGT)
CGT deferral relief
Exemption from Inheritance Tax
Loss relief

For more details, visit: EIS Guide for Companies - BDO. For very small early-stage companies, see SEIS Guide for Companies - BDO.

Enterprise Management Incentives (EMI)

EMI share options are designed to help small- to medium-sized companies operating a qualifying trade to recruit, retain and reward key individuals. The scheme is beneficial for both companies and key employees from a flexibility and a tax perspective - we regularly see scaling businesses opt for EMI as their incentive scheme of choice.

There are several thresholds and conditions that must be met to qualify - those relating to the size of the company are:

Gross assets less than £30 million (on a group basis, excluding intra-group transactions)
Fewer than 250 full-time equivalent employees.
The company can grant up to £250,000 of options per employee with an aggregate limit of £3 million across all employees (each assessed at the time of grant). Once any condition is breached, no further EMI options can be granted.

If an EMI scheme is being considered as a means of incentivising individuals, this must be implemented prior to the above conditions being breached.

The tax treatment of EMI options, assuming qualifying options are granted with an exercise price equal to market value at that time, can bring significant benefits, including:

No income tax or NIC liabilities on grant or exercise.
CGT treatment for the employee on sale of the shares (currently at 20%, but potentially at 10% on the first £1m of gain if the options were granted more than two years before the share sale).
A corporation tax deduction on the option gain (market value at exercise less the exercise price). This can be substantial, and on a sale transaction can often boost the price as a valuable tax asset.

For more information: Enterprise Management Incentives (EMI) - BDO

For businesses that have grown beyond the EMI thresholds, there is also the Company Share Option Plan (CSOP) scheme to consider (amongst other solutions). This scheme has a lower value of £60,000 of share options per employee but is otherwise similar but not as flexible, see Company Share Option Plan (CSOP) - BDO.

IR35 for scale ups

The off-payroll working rules, commonly known as IR35, ensure that workers who provide services through an intermediary (such as a personal service company or ‘PSC’) pay similar income tax and NIC as employees if they work in a similar way.

Once your business has grown beyond ‘small’, you become responsible for determining the worker’s employment status under IR35 and for accounting for any PAYE/NIC due. Here, a business is only considered small if it meets two of the following conditions:

Annual turnover of £10.2 million or less
Balance sheet total of £5.1 million or less
50 employees or fewer.

Failing to comply with IR35 can result in significant tax liabilities and penalties.

It is also important to note that if "freelance" individuals work for your business as self-employed workers directly rather than via a PSC, there is a statutory requirement for your business to establish their employment status for tax. This is not dependent upon the size of your company, often catching out growing businesses where individuals become more involved over time, and exposes the business to penalties if you get it wrong. Read more at IR35 - BDO.

Transfer pricing

Tax authorities want to ensure that profits are taxed in the country where the value is created.

The Transfer Pricing (‘TP’) provisions ensure related party transactions are carried out on an ‘arm’s length’ basis for corporation tax purposes (i.e. based on a price charged to an independent business), it is therefore important to establish a supportable transfer pricing policy in order to ensure that profits and cash sit within the appropriate entities within the group.

Small & medium sized enterprises (SMEs) are generally exempt from the rules, until the following SME threshold is crossed:

You have more than 250 employees or, if less,
Either annual turnover exceeds €50 million or gross assets exceed €43 million.

But it is important to remember that other countries have different, or no, thresholds.

The TP rules come with strict requirements to document and evidence the arm’s length basis and pricing methodology – failure to do so can lead to double taxation, reputational damage and potential reassessments, penalties and interest (both within the UK and overseas).

For more information: Transfer Pricing - BDO.

Research and Development (R&D)

Tax relief for companies engaging in R&D activities had historically been split between the large company (RDEC) scheme and the SME scheme, however, for accounting periods beginning on or after 1 April 2024 R&D relief will be delivered as one ‘merged’ scheme.

Running parallel to the merged scheme, a separate "SME R&D intensive" scheme continues, and is particularly valuable for loss-making knowledge intensive companies (broadly where 30% or more of total expenditure is R&D qualifying, or 40% in periods prior to the merged scheme taking effect). The scheme provides an 86% uplift to qualifying costs. The thresholds to qualify as an SME for this purpose are:

Up to 500 staff
Turnover up to €100m
Balance sheet up to €86m

As a loss-making SME, you may still be able surrender your R&D tax relief for a repayable credit. This can provide much-needed cash flow to support ongoing business costs. The credit is calculated at a rate of 14.5% of the surrender-able loss. For more information: R&D Tax Reliefs - BDO.

Senior Accounting Officer (SAO)

UK groups with a total UK aggregated (not consolidated) turnover of greater than £200 million and/or a relevant balance sheet total of more than £2 billion fall within the SAO regime. The appointed SAO must ensure that the company has appropriate tax accounting arrangements and provide a signed certificate to HMRC each year – read more at Senior Accounting Officer - BDO.

Helping your business

As businesses scale-up, both in the UK and internationally, identifying and navigating the complex landscape of tax rules and exemptions is essential. Understanding and applying these rules can help your businesses stay compliant and optimise your tax position.

We have been recognised as the number one advisor to scaleups by the ScaleUp Institute for the second consecutive year, highlighting our expertise in guiding businesses through the complexities associated with growth.

If you need further guidance on any of the above, please get in touch.