Insights

As investment finance remains difficult to secure for entrepreneurs and business owners, Government-backed schemes like the Enterprise Investment Scheme (EIS) and its counterpart, the Seed Enterprise Investment Scheme (SEIS), are well worth knowing about. They offer very generous levels of tax relief to investors, and companies can use them as incentives to attract important growth funding. However, research suggests that many business owners are not aware of them, or the tax benefits they offer.

This was the finding of a study published earlier this year in the Daily Telegraph. It reported that a third of entrepreneurs did not understand EIS or SEIS or appreciate the tax reliefs available to investors. And 25% of respondents admitted to never having heard of them in the first place. This article will explain exactly how EIS and SEIS work and how business owners can benefit from them.

What is the Enterprise Investment Scheme (EIS)?

The Enterprise Investment Scheme (EIS) has been heavily promoted and improved upon by the Government in recent years. It is designed to help smaller trading companies (who are often perceived to be high risk for investors) to get access to growth finance. In return for investing finance in exchange for shares, EIS investors are able to benefit from a range of tax relief opportunities. Importantly the scheme is only available to trading companies and not applicable for investment or property development companies.

Individual investors can invest up to £1,000,000 by subscribing for shares in a qualifying company and receive up to 30% income tax relief and the subscription can be carried back for relief in the previous tax year if beneficial.

In addition to 30% income tax relief, if the shares are held for at least 3 years, any capital gains arising when they are sold are exempt from capital gains tax.

Furthermore, it is possible to ‘roll over’ any other capital gains that are matched by a qualifying EIS subscription within one year before and three years after the disposal. This is a deferral rather than an outright saving, and the gain ‘rolled over’ will become taxable when the EIS shares are disposed of.

It is not possible for individuals to benefit from EIS relief if they have an existing connection with the company. This rule mainly excludes someone who is or has been a director or employee of the company from benefitting, or someone who controls more than 30% of the company’s capital.  The exception to this rule is directors who can be classified as Business Angels, and who, although they are directors and have made a financial investment, they do not benefit from any remuneration other than the reimbursement of expenses.

Qualifying conditions for EIS companies

If you are a director and interested in registering your company under the EIS, your company must:

• be an unquoted company carrying on a qualifying trade, or the holding company of a trading group. Aim and PLUS listed shares are considered to be unquoted for this purpose;

• not be controlled by another company;

• not be in ‘enterprise difficulty’ for the purpose of the European Commission’s Rescuing and restructuring guidelines;

• have gross assets not exceeding £15 million immediately before the EIS share issue and £16 million immediately after the issue;

• employ less than 250 full-time employees (or their equivalents) at the time the shares are issued;

• receive payment for shares issued immediately upon issue;

• not raise an annual amount of more than £5m through ‘risk capital’ schemes.

It is possible to obtain an advance opinion from HMRC that a company qualifies under the EIS, and this advance opinion is often required by potential investors in order to give them comfort prior to investing.

What is the Seed Enterprise Investment Scheme (SEIS)?

SEIS can probably be considered the younger sibling of EIS and it is designed to complement the original EIS scheme. It is specifically aimed at supporting very early stage startup companies and, because these present a higher risk for investors, it duly offers higher rates of tax relief and therefore higher incentives for potential investors.

The rules governing SEIS are very similar to EIS and it is expected that qualifying companies will eventually become recipients of EIS funding once they reach a certain size and maturity. Interestingly however, the SEIS has a limited lifespan until 5 April 2017, unless it is later extended by the Government.

Investors are able to invest up to £100,000 through SEIS in a single tax year and in return, they have the potential to benefit from income tax relief of up to £150,000. As with the EIS, any gains on shares held for at least 3 years are free from capital gains tax.

For 2012/13 only there was a capital gains tax reinvestment relief available.

Qualifying criteria for SEIS companies

• The company must have been trading for less than two years and be carrying on, or preparing to carry on a new business;

• It must have less than 25 employees;

• It must own assets of less than £200,000;

• The maximum amount of all SEIS investment together with any other state aid received by the company in a three year period must not exceed £150,000;

• If a start up business needs to secure a larger amount of funding than £150,000 it is possible to combine both SEIS and EIS investments, but the application for EIS cannot be made until 70% of original funds obtained through SEIS have been utilised. Failure to comply with this restriction could result in SEIS/EIS tax relief status being removed for investors;

• As with the EIS, an investor under the SEIS scheme is not able to own more than 30% of the shares of the company;

• It is not possible to apply for SEIS if a company has already participated in EIS, but it is possible to apply for EIS following SEIS (subject to the conditions mentioned already);

If you are interested in finding out how SEIS and EIS could benefit you, either as an investor seeking tax efficient opportunities, or a company seeking finance, please contact Simon Paterson by emailing sp@rjp.co.uk.