Tax Efficient Finance For Your Company

HMRC have recently updated their guidance for companies looking to attract investors to buy shares in their company. If structured correctly, and the company qualifies under the Enterprise Investment Scheme (EIS) rules or the Seed EIS rules, the investors can potentially take advantage of a number of generous tax breaks.

Under EIS, the company can raise up to ￡5 million each year, and a maximum of ￡12 million in the company’s lifetime. This also includes amounts received from other venture capital schemes. The company must receive investment under a venture capital scheme within 7 years of its first commercial sale.

The size of the issuing company is crucial as the company and any qualifying subsidiaries must:

• not have gross assets worth more than ￡15 million before any shares are issued, and not more than ￡16 million immediately afterwards
• have less than 250 full-time equivalent employees at the time the shares are issued

The investment in your company must meet the “risk to capital” condition, which means:

• your company must use the money for growth and development
• the investment should be a risk to the investors’ capital

Growth and development means you’ll use the investment to grow things like your revenue, customer base and number of employees.

There are a number of other complex scheme rules that need to be followed so that your investors can claim and keep EIS tax reliefs relating to their shares. Tax reliefs will be withheld or withdrawn from the investors if they, and the company, do not follow the rules for at least 3 years after the investment is made.

It is advisable to apply for Advance Assurance from HMRC that the company is an EIS qualifying company before the shares are issued.

For more details see: Use the Enterprise Investment Scheme (EIS) to raise money for your company - GOV.UK (www.gov.uk)

Seed EIS (SEIS) is designed to encourage investment in small start-up companies and, like EIS, provides a number of tax breaks for individuals who buy new shares in the company. The company must not have been trading for more than 2 years when the SEIS shares are issued.

Only the first ￡150,000 of share capital raised by the company qualifies for Seed EIS relief but this can form part of a larger share issue with subsequent share issues qualifying for EIS relief up to the ￡5 million annual limit.

Like EIS the tax reliefs will be withheld, or withdrawn, from your investors if you do not follow the rules for at least 3 years after the investment is made.

There is a key condition that the company is an unquoted company carrying on or preparing to carry out a qualifying trade at the time that the shares are issued.

Another important condition to qualify under Seed EIS is the company and any of its subsidiaries must:

• not have gross assets over ￡200,000 when the shares are issued
• not be a member of a partnership
• have less than 25 full-time equivalent employees in total when the shares are issued

Like EIS it is advisable to apply for Advance Assurance from HMRC that the company is a?qualifying company before the shares are issued. For more details see: Use the Seed Enterprise Investment Scheme to raise money for your company - GOV.UK (www.gov.uk)

Tax Breaks for EIS Company Investors

Unconnected investors may claim income tax relief of 30% of the amount that they invest in qualifying EIS companies up to ￡1 million each tax year (or up to ￡2 million if at least ￡1 million of that is invested in knowledge-intensive companies). Thus a ￡10,000 investment would result in a ￡3,000 reduction in their income tax liability.

The connected persons tests are complicated, for example directors cannot claim EIS tax relief if, at the time the shares are issued, they are a paid director of the company, unless the payment is a ‘permitted payment’. They may however become a paid director after their investment under the ‘business angel’ rule.

Provided the shares are held for at least 3 years the income tax relief is retained and any gain on disposal of the shares would be exempt from capital gains tax.

It is also possible to defer capital gains on any asset disposal by reinvesting the gain in qualifying EIS shares.

Tax Breaks for SEIS Company Investors

Unconnected investors may claim income tax relief of 50% of the amount that they invest in qualifying EIS companies up to ￡150,000 in each tax year. Thus a ￡10,000 investment would result in a ￡5,000 reduction in their income tax liability.

The connected persons tests are complicated and similar to the EIS rules; however directors can claim SEIS tax relief.

Provided the shares are held for at least 3 years the income tax relief is retained and any gain on disposal of the shares would be exempt from capital gains tax.

A further relief for SEIS investors is that 50% of the amount invested may be set against capital gains that year. Thus a ￡10,000 investment would mean that the investor could deduct ￡5,000 from their capital gains that year in addition to the ￡5,000 reduction in their income tax liability.

Please talk to us about SEIS or EIS schemes for your business.

?www.mjb.co.uk | 08000 388799 | [email protected]