Why your start-up should be considering EIS and SEIS tax reliefs

SEIS an EIS tax reliefs for investors and companys
Feb
24
Posted 2019 by Chris Davies

Aimed at small and/or start-up companies looking to raise money from investors the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) both offer very attractive tax reliefs. Often used in conjunction with crowd funding platforms these schemes are proving to be very popular.

The SEIS is aimed squarely at start ups. In order to qualify the company must have less than 25 full time staff, gross assets must not exceed £200k and it cannot ever raise more than £150k through SEIS. The incentives to invest include an income tax reducer of 50% and capital gains on up to half of the amount invested can be permanently eliminated. Any capital gains on the SEIS investment are fully exempt after 3 years. In addition if the investment proves to be worthless then a claim can be made for income tax relief on the remaining 50% of the investment. It may be easier to demonstrate with an example:

Imagine an individual invests £10,000 in an SEIS company:

He obtains 50% income tax relief                                                              £5,000

£5,000 of capital gains can be exempted from tax.
In this case saving tax at 28% on the gains                                             £1,400

Total tax saving at outset                                                                            £6,400

The investment subsequently proves to be worthless

Further income tax relief due on £5,000 at IT rates (say 40%)           £2,000

Total tax saving on investment of £10,000                                            £8,400

If each £10,000 investment is only costing this taxpayer £1,600 then he could afford to lose a few before one pays off and still be better off.

 

EIS relief is similar in many ways. An EIS company must have less than 250 full time employees and must not have gross assets worth more than £15M. It can raise up to £5M each year, up to a maximum of £12M over the company’s lifetime. The incentives to invest include income tax relief on the investment of up to 30% and the possibility to defer previous capital gains on the total amount invested. Note than in this case the capital gains are only deferred until the EIS shares are eventually (if ever) disposed of.  Any capital gains on the EIS investment are fully exempt after 3 years. In addition if the investment proves to be worthless then a claim can be made for income tax relief on the remaining 70% of the investment. It may be easier to demonstrate with an example:

Imagine an individual invests £10,000 in an EIS company:

He obtains 30% income tax relief                                                             £3,000

£10,000 of capital gains are deferred from tax.
In this case deferring tax at 28% on the gains                                       £2,800

Total tax saving/deferred at outset                                                          £5,800

The investment subsequently proves to be worthless

Further income tax relief due on £7,000 at IT rates (say 40%)           £2,800

Total tax saving/deferred on investment of £10,000                          £8,600

If each £10k investment is only costing this taxpayer £1,400 then once more he could afford to lose a few before one pays off and still be better off.

Because these reliefs are so generous there are quite a few restrictions to be aware of. The money raised must be used to grow or develop a business and pose a risk of loss of capital to the investors and consequently not all trades are eligible. There are also restrictions that apply to the investor themselves, for example no investor (including defined connected parties) can hold more than 30% of the shares in the company and there are also rules that apply to the type of shares that can be held.

This is a complex area which may involve considerable sums of money. If you are thinking of using an EIS or SEIS to raise money it’s wise to take advice from a specialist accountant with experience in EIS and SEIS. They can guide you through the do’s and don’ts as well as submitting advance clearances to HMRC and dealing with the necessary EIS paperwork for both the employer and investor.

We have many years of experience assisting company’s with EIS and SEIS applications across many industries. Recent cases have involved drone technology, Artificial Intelligence systems and development of contactless payment systems to name but a few,

Do please get in touch if you would like to know how we can help you.

 

NB: The above examples are for illustrative purposes only and every taxpayer’s circumstances will be different. Consequently no action should be taken on the basis of the examples set out above