Seed enterprise investment scheme
Anyone who has been involved in tax for a while may be forgiven for thinking that this bears more than a passing resemblance to the old Business Start Up Scheme that mutated into the Business Expansion Scheme, now the basis for the Enterprise Investment Scheme (EIS). SEIS is not there to replace the EIS, but to run alongside that and the Venture Capital Trust (VCT) regime.
The scheme is not permanent, but relates to shares issued from 6 April 2012 until 5 April 2017, although this term may be extended by Treasury Order. It is only available to individual investors in very small companies, and is not available to investors in partnerships or LLPs.
The investment limit for a qualifying individual in a fiscal year is £100,000. However, they cannot claim tax relief until the company has spent at least 70% of the money invested. The individual must not be an employee of the company from the date of incorporation of the company until at least three years following the issue of the shares. A director is not an employee for this purpose.
The investor must not have a ‘substantial interest’ (more than 30% of the ordinary share capital or votes) and there are anti-avoidance provisions where there are pre-arranged exits or loan arrangements.
The investment must be in cash and must be invested in shares which are fully paid when issued. The shares cannot carry a preferential right to dividends, to assets on a winding up, or to redemption. These shares must be held by the investor for three years after issue. There will be a claw back of relief if the shares are not held for the requisite period.
The income tax relief is 50% and any gain will be exempt, provided the investor (or spouse or civil partner) held the shares for the three years following the issue. In the case of a spouse or civil partner receiving the shares from the original investor, it is the recipient who will be charged to tax on any claw back on a disposal. Note that a gain will be completely exempt, compared with the existing EIS scheme, which only offers a deferred gain, although for EIS there is no limit to the amount of gain deferred. The rate of income tax relief for an existing EIS scheme is only 30%.
The company will have to consider its funding options as it will be able to raise EIS or VCT finance after a SEIS initial finding, though not until the company has spent 75% of the SEIS monies available. However, SEIS will not be available if EIS and VCT funding regimes have already been utilised.
To obtain the relief:
- the company must be a new company, incorporated within the two years prior to the issue of the shares;
- the shares must be issued in order to raise money for a new trade and the cash raised must be spent within two years following issue;
- the total of SEIS investments must not exceed £150,000; the limit for VCTs will increase from £2m to £10m;
- the company must exist for the purpose of carrying on one or two new qualifying trades;
- the company must have a permanent establishment in the UK and its shares must be unquoted;
- the company cannot be part of a group and must not be a member of a partnership or similar entity;
- the total value of the company’s gross assets must not exceed £200,000 at the time of issue. If there is a related company the relevant proportion of the assets must be included in this total;
- the total full-time equivalent employees must not exceed 25 at the time of issue; employees include directors for this purpose. The limit for an ordinary EIS scheme will increase from 49 to 249;
- there must be no EIS or VCT investment in the company before the SEIS shares are issued.
Companies considering using the Seed Investment Scheme (SEIS) have the option to obtain Advance Assurance or formal clearance from HMRC Small Company Enterprise Centre (SCEC). Before giving the assurance HMRC will consider if the company will be a qualifying company carrying out a qualifying business activity, if the shares will be eligible shares and if the money raised will be used in a manner which satisfies the rules of the scheme.
If the company wishes to rely on an assurance, the onus would be on the company to provide all relevant information drawing attention to any particular issues which could mean that the company may not meet the requirement of the scheme when the shares are issued. Full guidance on the Advance Assurance application can be found on the HMRC website.
Other proposed changes to the EIS and VCT regimes are:
- a relaxation to the definition of shares which may qualify for EIS relief to include certain shares with preferential rights;
- the removal of the current £1m limit for VCT investment for companies not in partnership;
- the increased limit for individual investment in EIS from £500,000 to £1m;
- the maximum amount of gross assets held by a company before/after investment to rise from £7m/£8m to £15m/£16m;
- the maximum a company can raise each year from all tax-relieved venture capital schemes will increase from £2m to £10m.
There will also be a new disqualifying purpose which will disqualify shares which ‘are issued subject to arrangements whose main purpose is to generate access to the reliefs in circumstances where either the benefit of the investment is passed to another party to the arrangements, or the business activities would otherwise be carried on by another party’. This is aimed at limited-life arrangements, which have been popular within VCT.