Paula Tallon explains the workings of the Seed Enterprise Investment Scheme (SEIS), designed for start-up companies
The SEIS is a proposed new venture capital relief aimed at start-ups. The draft legislation spans some 48 pages and the rules are complex. The purpose of this article is to provide practitioners with an overview so they are familiar with the proposals.
SEIS relief will be available for shares issued between 6 April 2012 and 5 April 2017, although this may be extended. The relief operates by reducing an individual’s income tax liability by 50% of the amount invested in qualifying shares up to a maximum investment in the year of £100,000. The relief can be used in the year of investment or carried back to the previous year.
Neither the investor nor an associate of the investor can be an employee of the company throughout the period from incorporation to three years after the issue of shares. This rule does not apply to directors. With careful planning this relief can be used by the individuals working in the company. The investor (and associates) cannot hold more than 30% of the ordinary share capital, the issued share capital or the voting power in the company.
Shares on which relief is being claimed must be issued within two years of the incorporation of the company. The maximum amount that a company can raise under SEIS is £150,000.
The company must exist for the purpose of carrying on one or more new qualifying trades throughout the period of three years from the issue of the shares.
Qualifying trades is defined in legislation, and excludes, for example, property development, leasing, farming and market gardening.
The company must have gross assets of less than £200,000 immediately before the relevant shares are issued. Where another business (‘partner enterprise’) holds more than 25% of the shares in the SEIS company a proportion of the investor’s assets is included in assessing if the £200,000 limit is breached.
The company can have no more than 25 employees, with special rules dealing with part-time employees and employees of ‘partner enterprises’.
The company cannot be under the control of another company at any time up to three years after the issue of SEIS shares, and no arrangements must be in existence at any time during that period by virtue of which the company could fail this requirement.
Furthermore, the issuing company must not control any company at any time up to three years after the issue of SEIS shares, and no arrangements must be in existence at any time during that period by virtue of which the company could fail this requirement. The issuing company must not be a member of any type of partnership and must be financially sound when the shares are issued.
The claim for relief
A claim for relief cannot be made until a compliance certificate has been issued by the company. The certificate cannot be issued until at least 70% of the money raised by the issue has been spent by the issuing company on the qualifying business activity. Before issuing the certificate the company must provide a compliance statement to HMRC, who then authorises the issue of the compliance certificate. The procedure is, therefore, similar to the EIS 1 procedure, which is used for EIS purposes.
Withdrawal of relief
Relief can be withdrawn in a number of situations, which are very similar to situations giving rise to withdrawal of EIS relief. Principally relief will be withdrawn if the shares are sold or options are granted before the end of Period B, or if value is received by the investor. There are other anti-avoidance measures which may give rise to a withdrawal of relief.
CGT exemption for 2012/13
Where an individual makes a capital gain in the year 2012/13, the gain is reinvested into a company, and the individual claims SEIS relief for that investment, the gain will be exempt from capital gains tax. This results in a combined relief of 78% so investors may consider deferring a disposal until after 6 April if the intention is to reinvest the proceeds in a new venture.
CGT treatment of SEIS shares
Where SEIS shares are sold at a loss, and income tax relief has not been withdrawn, that loss is reduced by the amount of the relief. For example, if an individual subscribed £10,000 for shares in a SEIS company income tax relief would be £5,000. If those shares are sold more than three years after the shares were issued for £3,000, the loss of £7,000 would be reduced by the income tax relief of £5,000. The allowable loss would be £2,000.
Where a gain is made on the sale of SEIS shares and the relief has not been withdrawn, the gain is exempt from capital gains tax.
This relief if based largely on EIS rules, but is aimed at the smaller company that finds it difficult to raise funds. The key attraction, CGT exemption on gains reinvested in SEIS companies, is only available for one year, and is really attractive for gains up to the level of maximum investment in SEIS companies. With careful planning your client could have tax relief of 78%!
This article is taken from “Accounting Practice” the ICPA quarterly magazine. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at www.icpa.org.uk or email [email protected] or by ‘phone on 0800-074-2896