In the latest in our blog series aimed at SaaS businesses, you’ll learn about some tax and finance issues you should think about as soon as possible.
You’ll gain insights from two experts at the international tax, audit and advisory firm Forvis Mazars: Chris Ridley, Tax Partner & Head of UK Innovation Incentives (R&D & Patent Box); and Catherine Hall, Partner in International Tax and Global Compliance & Reporting.
You’re going all-out to grow your software business – so the tax problems of larger and international companies might seem like something to worry about in the far-flung future.
But you can find yourself getting into some fairly onerous obligations much earlier than you might have expected. And unless you’re armed with some knowledge early on, you could even find yourself stumbling into these liabilities unaware.
“We often see successful, fast-growing businesses trip over thresholds that they didn’t realise they were going to breach,” says Forvis Mazars’ Catherine Hall.
Many of those thresholds are aimed at businesses with a seven or eight figure turnover– so if you’re in a startup or even a scaleup, they might look like a problem you’d love to have one day.
But Catherine says someone needs to be thinking about these issues on behalf of your business. “While you might not be near those thresholds today, if you’re growing fast, you could find yourself breaching them earlier than you anticipated,” she says.
“What’s more, we’re seeing tax authorities, particularly in the UK, take principles that apply to larger corporations and start applying them to growing businesses at the smaller end of the scale.”
Whatever the current size of your business, there are plenty of liabilities that can catch out the unwary – and some opportunities you could miss out on too.
Below are some of the key questions you may need to anticipate.
This is a rule aimed at large corporations that growing businesses need to at least be aware of.
Transfer pricing regulations require transactions between connected businesses to be carried out on the same terms as they would be for outside businesses.
“The aim is to prevent the artificial movement of profits to gain a tax advantage,” says Catherine.
Small and medium-sized businesses are currently generally exempt from these rules. The UK chancellor Rachel Reeves announced in autumn 2024 that there would be a consultation on limiting that exemption. No more detail has yet been released but it’s one to watch. In any event thresholds below which transfer pricing does not apply in overseas jurisdictions may be much lower than the UK or absent.
“As you’re growing, you will want to bring on board more employees and potentially look at contractors,” says Catherine.
That means running into IR35: the rules designed to prevent tax avoidance by people who are officially contractors but really function as staff.
Things could get more complex still if your contractors are not in the UK.
“Software businesses quite commonly decide there’s a great pool of talent available in another country that they can tap into at a contractor level,” says Catherine.
“By starting to use people that might not be in the UK, you might find you’ve accidentally acquired other obligations or compliance requirements.”
What’s more, an eagerness to draw on talent from overseas can rule you out of tax breaks for research and development.
Forvis Mazars’ Chris Ridley says: “Historically, a lot of people have drawn on talent pools in different jurisdictions for software development. However, since1 April 2024, all workers engaged on R&D should be on a UK payroll in order for their work to qualify for R&D tax incentives, unless there are exceptional circumstances.
“Proactive companies have looked at their business model and have made a decision about whether they wanted to keep their development overseas or whether they could get those skills in the UK.”
Your SaaS company could miss out on tax credits designed for innovative businesses.
If you’re working towards an advance in science or technology, you could qualify for R&D tax relief – potentially worth up to 86% of qualifying costs for a small or medium-sized business.
However, the window for making claims has been shortened substantially.
“We used to have a fair few clients that didn’t even realise that parts of what they did qualified as R&D,” says Chris.
“In the past, we could submit claims for accounting periods that had ended up to two years previously. But now, if you’ve not previously made a claim for UK R&D tax relief, you additionally have to notify HMRC of your intention to make a claim within six months of the accounting period ending.”
Innovation incentives are not just about R&D. There could be up-front grants for work that you’re about to do. And if you get a qualifying patent for work you’ve done, you could be looking at a headline 10% rate of corporation tax on any profits derived from that patent – far preferable to the standard rate of 25%.
But Chris adds: “You need a well-documented IP strategy that lays out how you’ll develop your IP, how you’re going to protect it, exploit it and make sure it’s regularly updated and challenged, to make sure you’re maximising the revenue and income from those patents.”
Your business might also take advantage of incentives for capital investments. “This used to be relatively simple and there’s an effort afoot to simplify it again but it’s still a minefield,” says Chris. “There’s a whole raft of different strategies in relation to capital allowances that should be considered but you need someone who’s up to date with the detail.”
Becoming an exporter might be a goal for your business – but you can find yourself almost stumbling into it as orders come in or opportunities arise.
“You need to make sure that what seems a good opportunity isn’t diluted by an additional tax cost,” says Catherine.
The risk of landing yourself with extra tax and compliance burdens is higher if you’re establishing a presence in the country concerned.
“When you create a permanent establishment that’s effectively a presence in another jurisdiction, without setting up a formal corporate structure there, you could be deemed to be trading in another country rather than just trading with that country,” says Catherine.
“We like to be there when our clients are thinking about this, so we can have a conversation with colleagues on the ground in the right jurisdictions.”
The US, even before Donald Trump announced tariffs on imports, has been a particularly complex case.
“The individual states have been much more aggressive about reporting requirements and additional tax obligations,” says Catherine.
“What’s more, when you have a multi-state presence, you can easily find that while you thought your customer was based in California, for example, your service is being supplied to a location in Nevada and that creates a different obligation.”
Knowing the market is all-important. “You could enter into what seems like a brilliant contract in a lucrative new market – but suddenly, when the contract needs to be settled, the customer says there’s a domestic withholding tax on the provision of software services,” says Catherine.
“There are a number of jurisdictions where they do that, particularly in Asia, and we sometimes find the client is on the phone at that point asking us what to do.”
It’s customary in the software industry not only to pay well but to offer other rewards to attract talent.
“Software businesses are labour-intensive and the software developers are normally reasonably well-paid if they’re at the top end,” says Chris.
“You’ll want a remuneration strategy which is beneficial to them but doesn’t cost the business as much when it comes to cash flow management.”
Often, that means equity rewards and share schemes. “Everyone thinks about granting shares or options in the early days of the business,” says Chris.
“However, once you’ve got a company that has real value, it’s may be more complex to offer these types of equity reward efficiently, without jumping through a lot of hurdles. So setting out the right incentives, not just for 1-2 years but for whatever you want to achieve in the business, is critical at the outset.”
Catherine adds: “You need to ask yourself: have I offered benefits that I now need to report on, where I didn’t previously? Am I offering share ownership that triggers additional compliance requirements? Again, the complexity generally arises when you breach certain size thresholds or start to trade internationally.”
If you don’t stay on top of tax and compliance when the business is young, there could be shocks in store in the future. That’s certainly the case when you seek external investment – or look to sell up.
“If you haven’t had conversations about all these tax and regulatory issues, they can come out of the woodwork when you have an adviser going through the records ready for an investment or sale,” says Chris.
“It can have an impact on the cash flow forecast and it can mean you have to adjust the value of the business – whether that’s the investment value or the price you get when you exit. You can suddenly find you’re not in the position you wanted to be in.
“We’ve had clients who thought they were going to sell their business, only for a lot of things to come up when our due diligence team looked at it. We’ve then supported their leadership over a period of months to eradicate those issues and remodel the business, so they can sell in two or three years’ time for the price they wanted.”
The arrival of outside capital can also bring more internal compliance because the investors will want you to report more regularly, says Catherine.
“If you’ve got good processes at the outset, that won’t come as such a shock – and you won’t be spending your time putting those processes in place just when you should be taking advantage of the new funds,” she adds.
“If you have the processes to manage your growth – and if each of the teams in your business understands what the trigger points and parameters are – then you have a stronger chance of not accidentally getting into areas you didn’t anticipate,” says Catherine.
“Your HR team, for example, will know that they can’t simply take on a contractor without consulting someone on what that means from a tax perspective.”
Chris adds: “If you don’t have the right support behind you, then what initially looked to be a profitable engagement might not be as profitable when you add on all the tax implications.”
“The fast-growing businesses are the ones that most need regular contact with a professional adviser,” says Chris.
“A professional adviser can identify what's coming next. When you’re an entrepreneur growing your business, you don't know what you don't know. Having an adviser that partners with you on that journey is vital.”
Getting on top of this stuff is going to mean stepping back from the business for a while and looking at the bigger picture.
Chris says: “It’s difficult but you need to take a step back and ask: What’s my vision, my goal in 5-10 years’ time?
“People will resist stepping out of the business and thinking about strategy because they feel they don’t have time when they’re running things. But those busy entrepreneurs are the ones that need to do it the most.”
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