Thinking of using an EIS or SEIS Scheme?
EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme) have become very popular amongst businesses looking to encourage investment and raise funds.
They allow the investors to offset up to 50% of their investment of new shares against their personal tax returns which can be a huge incentive to getting funds raised – but do you know all the rules surrounding these schemes?
EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme) have become very popular amongst businesses looking to encourage investment and raise funds. They allow the investors to offset up to 50% of their investment of new shares against their personal tax returns which can be a huge incentive to getting funds raised – but do you know all the rules surrounding these schemes?
The timing of EIS schemes is important as the company must have been trading for at least 4 months before the scheme will be approved. New shares must be paid in full at the point of the shares being issued, therefore the bank account must be ready before any of this can take place. If they are not, the EIS will not be available. These EIS schemes have requirements set upon both the company as well as the investor. This post looks at both of these areas in summary before then looking at how to apply for the scheme.
The Investor – The investor can not be a ‘connected’ person to the company. This means amongst other things that they can not have been in employment or had a financial interest in the business for the period starting 2 years before the date of share issue, nor within the 3 years following the share issue. An investor can not own more than 30% of the controlling votes nor be entitled to more than 30% of the assets upon winding up. If this were the case, the scheme would be withdrawn. It is possible that an investor could have owned some shares before the scheme, but the percentage ownership before and after the new issue play huge importance and are within set limits. Although the investor can not have been in employment 2 years before the date of share issue, it is possible for the investor to become a Director on a reasonable salary after the shares have been issued.
The shares must be held for at least 3 years from the date of issue, with full risk associated to them. The amount that can invested is also limited to £1 million which allows for a maximum of £300,000 (30%) tax relief. If the shares are later disposed of, after the 3 year period, any gain is free from CGT (Capital Gains Tax) if the relief if claimed.
The Investors must not ‘receive value’ from the company. This includes receiving favourable prices for assets sold the the business, or assets sold to the investor. There must not be any loans or benefits made to the investor. In addition, shares must not be bought back by the company within the period. Should any of this occur there is a period of 60 days to inform the tax office and tax relief will be withdrawn.
The Company – Companies can use the EIS scheme to raise finance. The type of company has certain restrictions upon it including its ownership and any subsidiaries. The company must also be an unquoted company. The EIS scheme is created to suit SMEs, therefore the number of staff at the time of share issue must be less than 250 also. The maximum amount a company can look to raise in any 12 month period is limited to £5 million. This includes investment made to the company through other EIS, SEIS and VC Trusts.
The investment must be used to continue the trade the business was created for and be used within 2 years of the share issue. The company can use the investment for research and development, as long as the research and development leads to further the trade already begun by the company. Ie, it can not be used for a separate trade. Companies must be confident that they can fulfil these requirements before applying for an EIS scheme. There are a list of trades that do not qualify for EIS schemes.
Applications – EIS schemes are administered by HMRC by the SCEC (Small Company Enterprise Centre). The SCEC’s job is to check the accounts and the plans of the company to ensure that the EIS scheme is applicable. The EIS application occurs after the shares are issued using an EIS1 form which is then sent to the SCEC for each share issue. If accepted, the SCEC will issue an EIS2 form confirming the qualification. EIS3 forms are also sent to the company to pass on to each investor. The investors can then use this documentation in their self-assessment tax return to obtain the tax relief. The tax relief is applied after all other reliefs are applied and the tax has been calculated.
Before all this takes place, the SCEC offer an “Advance Assurance” procedure allowing for the company to see if they qualify before the shares are issued and cash invested. This can save companies a lot of time and heart-ache in the future. It is also a key document companies can use to encourage investors before they even approach them.
SEIS – an SEIS is aimed towards startup businesses and encourages investors further by offering a 50% tax relief instead of the 30% tax relief of an EIS with the intention that the business will succeed and will make use of an EIS on a further round of funding in the future. It is acknowledged that as these share purchases have full risk associated to them and therefore startups require additional incentive to the investors to encourage them to spend their money. The Investment is limited an annual £100,000 for the investor and is also free from CGT is the relief is claimed.