Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS) provide attractive tax reliefs for those investors who are comfortable with the associated risks. Simon Littlejohns, Head of Tax at Birmingham accountants and business advisers Friend Partnership, explains more about EIS and SEIS, along with some factors to consider.
EIS and SEIS – the basics
In very simple terms, with an SEIS investment 50% of the investment can be taken as a relief against tax whilst it is 30% with EIS. The difference in rates is simply recognition that an SEIS investment is likely to be commercially more risky than an EIS investment.
The relief is a deduction from the investor’s tax liability in the tax year of the investment. Alternatively, part or all of the relief can be taken back to the tax year prior to that of the investment if that is more beneficial.
The relief reduces the tax liability potentially to nil but it does not create a repayment unless there is a carry back which results in a repayment of tax which has already been paid.
If the investment is held for at least 3 years there will be no capital gains tax on an ultimate disposal and after 2 years the investment will qualify for 100% Business Property Relief so no Inheritance Tax would be payable on death.
If the investment is not a success and the investor suffers a capital loss, this loss can be deducted from income. However, there are anti-avoidance rules here that limit the amount of any such deduction.
Investments which qualify for EIS and SEIS relief can give investors tremendous personal tax breaks even if the investment does not work out as anticipated.
Companies wishing to raise capital may also be more likely to attract investors if they can offer the EIS or SEIS tax breaks.
Things to consider with EIS AND SEIS
There are a number of conditions which apply to both the company and the potential investor which all need to be met before relief can be claimed. HMRC monitor the rules and conditions very closely and many an opportunity has fallen by the wayside because the rules have not been followed to the letter.
Some of the main issues which need to be considered are as follows:
- The company must be carrying out a qualifying trading activity – there are various activities treated as a non-qualifying so these need to be reviewed;
- There are financial limits for both the company and the investor which limit the amount the company can raise and an individual can invest;
- The shares acquired must be new ordinary shares issued for cash;
- The individual investor must have no connection with the company and must not have an investment that would give them more than 30% of the ordinary share capital;
- The financial limits for an SEIS company are much lower than those for an EIS company;
- An SEIS company must have a new trade which is a trade that has been going for less than 2 years; and
- The company must be an independent company and not under the control of another company.
Setting up a scheme
The authorisation procedures for both EIS and SEIS are very prescriptive cialisfrance24.com and care is needed when dealing with the various steps and completing the necessary forms.
It is possible for companies to secure an advance approval from HMRC that their activities qualify. This is an advisable approach if there is any doubt as to whether or not a company’s activities fall within the legislation.
The EIS and the SEIS rules give tremendous tax breaks for sophisticated investors and an opportunity for potentially qualifying companies to tap into a market which they may have overlooked to date.
However, care is needed as there is devil in the detail and HMRC are assiduous in ensuring that there is compliance with the legislation at all levels. Therefore, companies wanting to raise EIS and SEIS funds need to take great care and seek appropriate advice.