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Business Tax  •  Personal tax

3 common pitfalls when claiming for EIS or SEIS tax relief

By RJP LLP on 24 May, 2019

The enterprise investment scheme (EIS) and the seed investment equivalent for start-ups (SEIS) remain very popular amongst high net worth individuals who are looking for tax shelters. EIS offers income tax relief at the rate of 30% and SEIS at the rate of 50%, if the investments are held for 3 years in a qualifying company. They also offer capital gains tax exemption on the growth in value of the qualifying investment and holdover relief for other capital gains.

They can be used by entrepreneurs selling shares and reinvesting the taxable portion of their gains, and although the gain becomes taxable when the EIS shares are sold, any entrepreneurs’ relief that was available on the sale of the non-EIS qualifying shares can be retained and used on the later disposal of the EIS shares.

This can be cashflow efficient and as a recent case has highlighted, even if the qualifying criteria for entrepreneurs’ relief have changed, HMRC will still honour the original claim and allow the relevant amount of tax relief.

How to protect your EIS and SEIS tax reliefs

Although the rules to access EIS tax relief seem pretty straightforward, there are quite a few aspects that people tend to get slightly wrong and that can be expensive. Here are some common mistakes and what the potential implications are:

Wrong forms

EIS, SEIS; they seem so similar but according to HMRC there’s a big difference. If you use the wrong form, for example claiming EIS when the investment is actually an SEIS investment, you could end up with no relief. That’s what happened to Innovate Commissioning Services Ltd. They sought SEIS advance assurance from HMRC who agreed in principle pending receipt of the SEIS1 form.

Innovate sent in form EIS1 by mistake and by the time they realised, it was too late. In spite of contacting HMRC to explain the error, their investors were declined SEIS tax relief – even though HMRC knew it was a mistake and that they had intended to apply for SEIS based on their advance assurance request. It meant their investors could only qualify for the less generous EIS tax relief instead of SEIS relief.

Wrong share type

The wrong type of shares can cause no end of problems when it comes to accessing tax relief. The legislation states that when EIS shares are issued, they must be new ordinary shares that are not redeemable for at least 3 years and must not have any arrangements for a pre-arranged exit. This is much more onerous than the type of shares that will qualify for entrepreneurs’ relief (see our earlier article).

Flix Innovation Ltd slipped up here. The two company founders reorganised their shares and converted some to deferred shares which are a form of preference share. They didn’t realise that meant they would no longer qualify for EIS relief which is exactly HMRC’s stance and their argument when the decision was appealed.

Mistake on tax return

One of the conditions for accessing EIS relief as an investor is to include a tax relief claim on your self assessment tax return. One taxpayer, Ames, realised this to his cost in 2018. As a result of only having £42 of income in the tax year, he didn’t claim any income tax relief during the year when he made an investment in an EIS company. Then when he eventually sold the shares, he assumed he would get his tax relief but didn’t – because he hadn’t followed the correct procedure and submitted a claim at the right time. This case is ongoing, but demonstrates how important it is to follow the rules precisely.

Ultimately, EIS and SEIS company investments are risky enough anyway, without risking qualifying for tax relief – often the fundamental purpose for investing in such companies. It’s important to be aware of the details and get these little things right to then be able to enjoy the potential returns.

Contact us for expert advice on all matters relating to EIS and SEIS.

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31 December 2020 - Review disposals of chargeable assets to avoid a possible CGT increase

Capital gains tax is due to be reviewed by the government and if a CGT rise is announced, the new rates may become effective from the next tax year on 6 April 2021. Take advice now if you are thinking of selling property or have other assets giving rise to a capital gains tax liability.