You may have found yourself in the position where you’ve found a backer who’s excited about your business, but they won’t put money in unless they can get valuable tax savings under the Seed Enterprise Investment Scheme (SEIS) or the Enterprise Investment Scheme (EIS).
Unless you’ve done something like this before, you might not know what this means or how it applies to your business.
What are SEIS and EIS?
The basic idea behind these schemes is to encourage new investors to purchase shares in your company by providing them with tax relief. SEIS is intended for start-ups, whereas EIS is geared more toward established enterprises looking to expand.
Even though SEIS gives investors more tax breaks than EIS, EIS is better for large investments because it takes into account a company’s more advanced stage of growth.
In a nutshell, these tax-favoured investments provide the investor with income tax and capital gains tax benefits, but only if the investor and the investee business meet all of the eligibility requirements.
So, what are the risks?
For SEIS/EIS tax relief to be accessible, a number of requirements must be consistently met. If circumstances change and one or more of these requirements is no longer met, the investment may lose its eligibility for the SEIS or EIS tax benefit.
To keep your investors happy, think about this list of possible trouble spots and problems to avoid:
The time limit for spending the investment funds has expired
For the EIS or SEIS, the money raised from investors must be used for qualifying business activities within three years of giving the investors shares.
An investor wants to sell shares within three years
Shares issued under the SEIS/EIS must be held by the investor for a minimum of three years. In the event that they sell their SEIS/EIS shares within this time frame (other than to their spouse or civil partner), they may lose all or a portion of the income tax relief afforded to them as a result of the sale.
Preference shares have been issued
As long as the SEIS/EIS share class does not include any preferential rights, the issuance of shares in a separate class that include preference shares should not be problematic. It is important to consider how a new share class may affect current share rights whenever a new share class is introduced.
A family member has become a shareholder or an investor
If an investor owns more than 30% of a company, they are ineligible for tax relief under the SEIS/EIS schemes. In order to figure out this percentage, the total number of shares, their voting rights, and their nominal value are all taken into account.
This would include several specific relatives in the case of SEIS and EIS.
The business has changed
For investors to receive EIS or SEIS relief, the company must continue to engage in qualifying trading for at least three years after the investment is made. The business will no longer be eligible for SEIS or EIS tax relief if more than 20% of its trade is in an excluded industry like property development, financial services, or energy generation.
The business is facing insolvency
The ‘trading company’ criteria for tax relief is not met if a resolution is issued, an order is made by the court to wind up the business (or its subsidiary), or if the company is dissolved. In cases when the dissolution or winding up is being done for legitimate business reasons, however, this shortcoming is ignored (usually, that the company is insolvent). You can read more about SEIS/EIS loss relief here.
Failing to make an Income Tax Relief claim
You will be unable to get Capital Gains tax relief if you don’t file an Income Tax Relief Claim.
Get in touch
It is possible to rectify some issues so that the shares retain their SEIS and EIS tax-exempt status. Some mistakes may be able to be fixed, but investors may have to pay back tax refunds to HMRC in other cases.
If you think your business might have trouble getting SEIS or EIS tax relief, you can contact our tax team at firstname.lastname@example.org.