Summary

Today we take a deep dive into the tax reliefs available for start ups. When starting a new business there are two ways to boost growth; capital or investment. To encourage entrepreneurial businesses the Government allows investors to benefit from generous tax reliefs for certain businesses.If you are looking to invest or are seeking investment this is not one to miss. Enjoy.

Hello and welcome to Tax Able, today we are taking a deep dive into the world of innovation by looking at the tax beneficial ways to invest in start ups. Specifically we will discuss the following investment schemes; Seed Enterprise Investment Scheme and Enterprise Investment Scheme.

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SEIS/EIS are government initiatives and the aim is to encourage innovation by granting private investors significant tax breaks when investing in early stage high risk companies. The UK market is driven by small & medium sized companies and those company’s are hungry to grow and expand. To grow you need capital this can either be funded through debt or investment. New companies do not have the credit history to obtain reasonable lending rates from the banks so the alternative option is to obtain outside investment.

SEIS & EIS causes companies to become more attractive to investors as they will personally receive tax reliefs associated with their investment.
We will tackle this in two parts: Investors then on to the companies.

Investors
You have some money and you are thinking of investing in a company, either directly or though a Venture Capital Trust. Why would you want to choose a SEIS/EIS company? Well you get favourable tax reliefs.

Why do investors receive tax relief? Well, it is to recognise that although investing in start-ups can provide significantly higher rewards they are risky. To compensate investors for the risk you are undertaking tax relief is given.

SEIS – Seed Enterprise Investment Scheme
• This is the first stop for investment.
• Only available for company’s in their infancy which means the first 2 years of trading
• Funding is capped at 150k in total and a company cannot offer SEIS if it receives even 1p of funding through EIS or a Venture Capital Trust.

EIS – Enterprise Investment Scheme
• Once a company has maxed out its SEIS investment the next stop is EIS.
• Raise money in the first 7 years of trading.
• £5m of investment can be raised every year up to a maximum £12m but this can be extended if a company is classed as “knowledge intensive”.
• This means a company which is creating intellectual property and its sales will be driven by the IP.

Both SEIS and EIS provide investors with the similar tax reliefs but the rates are different.
Now investors there are limits you need to be aware of. Each individual can invest:
• £100k SEIS per tax year
• £1m EIS

Always remember to check the fine print:
• All shares must be ordinary so you cannot have any preferential rights attached.
• Cannot hold more than 30% of the share capital in a comapny
• Cannot be connected to the company by the way of employment or as a director
You can be appointed as a director afterwards but not before. Otherwise you lose your tax relief.

On to the tax reliefs and there are a few:
1. Income tax relief – it does what it says on the tin, you can reduce your income tax bill in relation to your investment. The deduction percentage is 50% for SEIS and 30% EIS. For example, you invest £50,000 in SEIS, you can reduce your income tax bill by £25,000. i.e. 50% of the £50k investment. Please note that it does not create a loss, it only reduces your liability to nil.
It is very important for the other reliefs that at least some income tax relief is claimed on your investments.
You can elect to carry back your investment to the previous tax year. This means you will get tax relief for the year before. This is useful if you cannot fully utilise the relief in the current tax year so you will want to carry back the investment to the previous year if you are then eligible to receive a full refund.
2. Capital Gains Exemption – If you hold your investment for at least 3 years, and the company retains it’s status for the whole period, any future sale of the shares will be exempt from Capital Gains Tax. Fine print – only eligible for this if you claimed income tax relief.
You do not need to sell after 3 years but it is the minimum holding period.
3. Capital Gains Deferral Relief – EIS -You can “roll-over” any Capital Gain on the disposal of other assets. This means if you have any shares, NFTS, crypto or second properties which have made a gain in the year. Remember gain is selling price minus purchase price and associated costs by the shares. This capital gain will only crystallise when you dispose of the shares.
Fine print – the disposal of the asset must have happened less than 3 years before the EIS shares were issued or 12 months after.
SEIS is slightly different as it is called reinvestment relief – when an asset is disposed so you have a capital gain you can reinvest 50%.
Fine print -This must match the same year in which you claim income tax relief.
4. Loss relief – If your shares are disposed at any time at a loss i.e. the MV/sales price is below what you paid the loss can be utilised in your tax return.

5. IHT relief – full relief after you have held the investment for 2 years.

If an investor is able to utilise all of the reliefs, is a higher rate tax payer your return on investment through tax relief is:
• 72.5% SEIS
• 61.5% EIS
You can see why it is so attractive.

All sounds great. You have your money ready so now lets look at who you can invest in.

Qualifying businesses
As the reliefs are so generous there is a strict criteria to qualify
1. Established in the UK
2. Unlisted
3. Be within a permitted size – gross assets under £15m + less than 250 employees. Unless KI companies have larger limits.
4. Control conditions – must not be controlled by another company so only the parent of a group will qualify.
5. Is expecting to continue to trade for the foreseeable future
6. Qualifying activity

Remember If you are part of a group then the group as a whole is looked at.

Only certain activities qualify so lets look at who does qualify:
• Dealing in land
• Property developer
• Deal in commodities
• Banking, money-lending
• Insurance
• Legal or accounting services
• Generating or exporting electricity
You are out.

Now don’t be disheartened, your business is only excluded if more than 20% of its activities consist of the above.
Process:
• Apply for advance assurance – this confirms your company qualifies – confidence to investors
• Once approved your investors can subscribe for qualifying shares
• Submit form no 1 to HMRC
• HMRC issues form no 2 to the company – i.e. acknowledged the investment
• Investor certificates form no 3

Important to keep copies of your certificates and give them to your tax advisers. When you claim any of the reliefs mentioned above your certificates are the evidence. If HMRC raise an enquiry your certificates will be requested as evidence.

We know your business qualifies for EIS/SEIS. You have investors who are expecting to receive relief. Now onto the most important bit. It is up to the company to maintain their status for a 3 year period after investment otherwise your investors will not receive their tax relief.

How do you maintain your status:
1. Raised funds must be used to promote and grow e.g. hiring staff, developing a product, marketing.
2. Money must be spent within specific time periods to stop cash hoarding – SEIS (3 years), EIS (2 years).
3. Cannot raise more than 5million in a 12 month period by EIS, SEIS and other VCT avenues.
4. Speak to advisers before adding any new revenue streams or companies to your group.
5. Consider impact on status if control is expected to change i.e. any share transfers
6. Regularly monitor your size and safeguard your status. Have a dedicated person who checks your status against the criteria.

The points to take away are:
1. SEIS and EIS are schemes which promote investment in innovate companies
2. Investors and companies benefit from the scheme
3. Investors receive beneficial tax reliefs
4. Investor certificates must be obtained and filed for future use in your tax returns.
5. Companies should obtain advance assurance from HMRC to confirm the company or group meet the relevant criteria.
6. Companies must continue to meet the criteria for 3 years after investment. This will require regular monitoring.

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