Enterprise Investment Scheme relief

Companies, particularly in the current climate, are struggling to raise finance.  However, there are various tax incentive investment schemes available offering a range of tax reliefs to individuals that purchase new shares in certain companies.

One of these schemes is the Seed Enterprise Investment Scheme (SEIS) which was introduced in April 2012.  As you will see from the requirements set out below, SEIS is specifically designed to help small early-stage companies to raise equity finance.

Tax Reliefs

The scheme aims to attract investment into these smaller companies by offering income tax relief on a maximum annual investment of £100,000.  The relief is given based on the cost of the shares at a higher rate of 50% rather than the 30% offered by the existing Enterprise Investment Scheme (EIS).  Providing the shares are held for at least 3 years and there has been no withdrawal of income tax relief, like existing EIS, any gain on the disposal of the shares is free from capital gains tax (CGT).

In addition, an individual will not pay CGT on a chargeable gain providing it is reinvested in shares which qualify for SEIS income tax relief.  For instance, an individual investing £80,000 in SEIS shares and also realising a chargeable gain of £50,000 on a disposal of an asset in 2012/13 will be entitled to an income tax deduction of £40,000 and will not pay CGT on the £50,000 gain.  The asset does not have to be disposed of first, the investment in SEIS can take place before the disposal of the asset provided it takes place in 2012/13.

As with existing EIS, for income tax relief there is a ‘carry back’ facility which allows all or part of the shares  acquired in one tax year to be treated as though they had been acquired in the preceding tax year.  As 2012/13 is the first year for SEIS, there is no scope for carrying back income tax relief before that year.  Consequently, an individual investing in SEIS shares in 2012/13 would need to ensure that they had sufficient tax liability against which to set their SEIS income tax relief.

There is an extensive time limit in which claims to relief may be made.  Investors can claim relief up to 5 years after the 31 January following the tax year in which the investment was made.  This is a longer period than for most reliefs, to take account of the fact that it is partially dependent on what the company does.

Income tax relief will be withdrawn or reduced if the shares are disposed of within the three years from the date they were issued or if any of the qualifying conditions cease to be met during that three year period.

Requirements

SEIS carries certain rules and requirements that mirror those of existing EIS with regard to the investment itself and the investor.  A major requirement is that the shares must be paid up in full, and in cash, when they are issued.  HMRC would therefore advise companies and investors to ensure that any shares on which it is intended SEIS relief will be claimed are not issued during the company registration process but are issued only at a later date when the company has had time to set up a bank account and is therefore able to receive payment for them.  The shares must be full risk ordinary shares.

In addition, there are requirements that have to be met when the shares are issued.  These are summarised as follows, the company:

  • Must be unquoted.
  • Must have fewer than 25 employees (250 for EIS).
  • Must have no more than £200,000 in gross assets (£15m before investment and £16m after investment for EIS).
  • Must not have had any investment from a Venture Capital Trust (VCT) or issued any shares under EIS (Although, subject to certain conditions, a company can follow a share issue under SEIS with further issues of shares under EIS or investment from a VCT).
  • May not receive more than £150,000 in total under the scheme (£5m for EIS).
  • Must have been trading for less than two years at the date the shares are issued.

It is worth noting that a company need not have started trading when it issues the shares however, it cannot submit a SEIS claim (on form SEIS1) until either:

  • It has been trading for at least 4 months, or
  • If not yet trading, it has spent at least 70% of the monies raised by the relevant issue of shares for the purposes of a qualifying business activity.

Income tax relief cannot be claimed by an individual until the company has submitted the SEIS1 claim form.

Further ongoing requirements also need to be met and most trades qualify for SEIS however, as with EIS, certain activities are excluded.  Examples, of excluded activities are the provision of legal, accountancy or financial services, property development and farming.