The Seed Enterprise Investment Scheme. Helping fledgling companies raise equity finance. The Seed Enterprise Investment Scheme 1

Transcription

1 The Seed Enterprise Investment Scheme Helping fledgling companies raise equity finance The Seed Enterprise Investment Scheme 1

2 Background The Seed Enterprise Investment Scheme (SEIS) is designed to help fledgling companies to raise equity finance by offering a range of tax reliefs to individual investors who subscribe for new shares in such companies. It is an extension of the Enterprise Investment Scheme (EIS) and offers significant tax benefits to investors in higher-risk small companies. SEIS is intended to recognise the particular difficulties that very early stage companies face in attracting investment by offering tax relief at a higher rate than that offered by the EIS. The Seed Enterprise Investment Scheme 2

3 Income Tax Relief An individual can subscribe a maximum of 100,000 for ordinary share capital in a qualifying SEIS company and obtain a tax credit of 50% to offset against their income tax liability in the tax year of investment or that of the prior year. An investor must have sufficient tax capacity to obtain the full benefit of the relief. If an investor has, say, a tax liability for the year of 20,000 and makes an investment of 100,000, relief of only 20,000 will be given and the balance of 30,000 will be wasted. To retain the income tax relief, the shares have to be held for three years from the date of acquisition. If the shares are sold within three years, the income tax relief given will be clawed back. Capital Gains Tax SEIS offers two significant capital gains tax (CGT) incentives - disposal relief and reinvestment relief. Disposal relief means that any growth in value of the SEIS shares themselves escapes a charge to capital gains tax. Reinvestment relief means that an amount up to 50% of the investment qualifying for SEIS income tax relief can be deducted from capital gains realised in the same year. If an election is made to carry back SEIS income tax relief, the relevant percentage of the investment can be deducted from gains realised in the earlier year. SEIS reinvestment relief goes further than the CGT deferral relief available under the EIS scheme, as the gains exempted will not come back into charge when the SEIS shares are sold. Again, the SEIS shares must be held for a minimum of three years to benefit from the CGT reliefs and a claim must also have been made for income tax relief. If the shares are sold within three years of acquisition, any reinvestment relief will be clawed back. The Seed Enterprise Investment Scheme 3

4 Inheritance Tax Relief Once SEIS shares have been held for a minimum of two years, 100% Business Property Relief will apply which will exempt the shares from Inheritance Tax. Example of available tax reliefs Harry sells an asset and realises a gain of 100,000. He has paid sufficient income tax to use the income tax relief available and decides to reinvest 100,000 into SEIS shares. After 3 years, Harry sells the shares for 120,000 realising a further gain of 20,000. The following tax reliefs will have been generated (ignoring annual exemptions): Income tax relief: ( 100,000 x 50%) = 50,000 CGT reinvestment relief ( 50,000 x 28%) = 14,000 Inheritance Tax relief* ( 100,000 x 40%) = 40,000 CGT disposal relief ( 20,000 x 28%) = 5,600 Total tax relief generated 109,600 *On disposal of the shares, reinvestment into further qualifying assets will be needed if Business Property Relief is to remain available. EIS The Seed Enterprise Investment Scheme 4

5 Qualifying Conditions - Shares The shares must be fully paid up in cash and they must be full-risk ordinary shares. SEIS shares cannot be redeemable, nor carry preferential rights to the company s assets in the event of a winding up. Although shares may carry limited preferential rights to dividends, this does not apply to rights where either: The amount or date of payment of the dividend depends to any extent on a decision taken by the company, the shareholder or any other person. The right to receive dividends is cumulative that is, where a dividend which has become payable is not in fact paid and the company is obliged to pay it a later time, normally once funds become available. In addition, there must be no arrangements in place to protect the investor from the normal risks associated with investing in SEIS shares and no arrangements at the time of subscription for the shares to be sold at the end of the relevant period. SEIS shares may not be acquired using a loan made available on terms which would not have applied other than in connection with the acquisition of the shares in question. The shares must not be issued under any reciprocal arrangements, where company owners agree to invest in each other s companies in order to obtain tax relief. SEIS shares cannot be redeemable, nor carry preferential rights to the company s assets in the event of a winding up. The Seed Enterprise Investment Scheme 5

6 Qualifying Conditions Investor Investors can subscribe for SEIS shares directly or via a nominee. They cannot possess a substantial interest in the investee company at any time from date of incorporation of the company to the third anniversary of the date of issue of the shares. For SEIS purposes, a substantial interest is defined as owning more than 30 per cent of the company s issued share capital, or of its voting rights, or of the rights to its assets on a winding up. In calculating whether an investor has a substantial interest, the shareholdings of associates are taken into account. Associates include business partners, trustees of any settlement of which the investor is a settlor or beneficiary, and relatives. Relatives for this purpose are spouses and civil partners, parents and grandparents, children and grandchildren. Siblings are not counted as associates for SEIS purposes. Furthermore, an investor cannot be an employee of the company at any time during the period from the date of issue of the shares to the third anniversary of that date. For this purpose, directors are not counted as employees. There is also an over-arching anti-avoidance rule that states that where the only or main purpose behind the subscription for SEIS shares was the avoidance of tax, then tax relief will be denied. If, during the qualifying period of three years from the date of issue, an investor either becomes an employee or acquires a substantial interest in the SEIS company, it will EIS be a disqualifying event and tax relief will be withdrawn. Relief will also be partially or fully withdrawn where an investor receives value from the investee company but not where the value received is insignificant. The level of insignificance depends on the amount initially invested but there is a de-minimis exemption of 1,000. There is also an over-arching anti-avoidance rule that states that where the only or main purpose of the subscription for SEIS shares was the avoidance of tax, then tax relief will be denied. This rule does not apply to bona fide commercial investments. The Seed Enterprise Investment Scheme 6

7 Qualifying Conditions Investee Company The company must meet the following conditions: The company must be unquoted at the time of issue of the shares, which means that its shares cannot be listed on the London Stock Exchange or any other recognised stock exchange. (It may become quoted later without the investors losing tax relief, but not if there were arrangements for it to become quoted when the shares were issued). AIM is not a recognised stock exchange for these purposes. It must have fewer than 25 employees. If the company is the parent company of a group, that figure applies to the whole group. It must have no more than 200,000 of gross assets. If the company is the parent company of a group, that figure applies to the total gross assets of the group, although intra-group investments are ignored. The company must not have previously raised any other Venture Capital Trust (VCT) or EIS finance. The aggregate of the amount raised by the company under the SEIS and the value of de minimis State Aid received by the company in the three years preceding the relevant share issue cannot exceed 150,000. If the relevant issue of shares takes thetotal over 150,000, then the excess will not qualify for relief. State Aid is de minimis if it does not have to be notified to the EU because of the amounts involved. Any trade being carried on by the company must be less than two years old when the relevant shares are issued. This condition applies whether the trade was started by the company or by another person who then transferred it to the company. The company need not have started trading when it issues the shares but the company must not have carried on any other trade before it started to carry on the new trade for which SEIS status is sought. The Seed Enterprise Investment Scheme 7

8 In addition to these criteria applying at the point the SEIS investment is made, there are further conditions which must be met from the date of incorporation: The company must not be controlled by another company or another company and any person connected with it. It must not be a member of a partnership. The company must have more than 50 per cent of the ordinary share capital of any subsidiaries and they cannot be controlled (by other means) by another company. From the date the shares are issued, the following conditions must be satisfied by the investee company: The company must be UK resident or have a permanent establishment in the UK. The company must exist wholly for the purpose of carrying on a qualifying trade but, if it is the parent company of a group, the group s business is looked at as though it were one business which must, in the main, meet the requirements of the scheme. There is no requirement that the company or group must begin a qualifying trade within a specified period of time. However, the company issuing the shares should be clear as regards the intended qualifying trade, and this should be apparent from the use to which the monies raised by the relevant share issue are put. The company EIS must not be in financial difficulty. The Seed Enterprise Investment Scheme 8

9 Qualifying Conditions Use of Funds Within three years of the date of the relevant share issue, all the monies raised by that issue must have been spent for the purposes of a qualifying business activity, carried on either by the issuing company or by a 90 per cent subsidiary. Failure to meet this condition will result in the loss of SEIS relief. The condition will be met if an insignificant amount is used for a non-qualifying purpose, or remains unspent. Monies raised by a share issue are not regarded as being spent for a qualifying business activity if they are used to buy shares or stock in a company. This does not prevent the issuing company from investing the monies in a subsidiary, provided that the monies are thereafter used by a 90 per cent subsidiary for the purposes of a qualifying business activity. The payment of dividends to shareholders is not regarded as being for the purposes of a qualifying business activity. A qualifying business activity is: carrying on a new qualifying trade; preparing to carry on a new qualifying trade which the company intends to, and begins to, carry on; or undertaking research and development which will lead to or benefit a new qualifying trade. The Seed Enterprise Investment Scheme 9

10 Qualifying Conditions Qualifying Trade A qualifying trade is one which is conducted on a commercial basis with a view to the realisation of profit. If a trade consists of 20% or more of excluded activities, it will not qualify for SEIS purposes. The list of excluded activities is as follows: dealing in land, in commodities or futures in shares, securities or other financial instruments; dealing in goods, other than in an ordinary trade of retail or wholesale distribution; financial activities such as banking, insurance, money-lending, debtfactoring, hire-purchase financing or other financial activities; leasing or letting assets on hire, except in the case of certain ship-chartering activities; receiving royalties or licence fees (though if these arise from the exploitation of an intangible asset which the company itself has created, that is not an excluded activity); providing legal or accountancy services; property development; farming or market gardening; holding, managing EIS or occupying woodlands, any other forestry activities or timber production; shipbuilding; coal production; steel production; operating or managing hotels or comparable establishments or managing property used as an hotel or comparable establishment; The Seed Enterprise Investment Scheme 10

11 operating or managing nursing homes or residential care homes, or managing property used as a nursing home or residential care home; generating or exporting electricity which is subsidised (for example, it attracts a Feed-in Tariff, unless carried on by a community interest company, a cooperative society, a community benefit society, or a Northern Irish industrial and provident society, or a European Cooperative Society (an SCE); generating heat, or producing gas or fuel, which is subsidised under a government incentive scheme unless carried on by one of the entities referred to above; providing services to another person where that person s trade consists, to a substantial extent, of excluded activities, and the person controlling that trade also controls the company providing the services. Obtaining SEIS status HMRC offer an advance assurance program that allows companies to submit details of their plans to raise capital, together with details regarding their structure and activity, to the Small Companies Enterprise Centre (SCEC). The SCEC will confirm whether the proposals meet the SEIS conditions. To formally apply for SEIS status, the company will need to complete and submit form SEIS1. Where a company has yet to start trading, it cannot seek SEIS status until more than 70% of the funds raised have been spent in respect of the qualifying business activity. For companies that have commenced trading, they must wait until four months of trading has elapsed before submitting form SEIS1. The form has to be submitted not later than the fifth anniversary from 31 January following the year in which the shares were issued. The Seed Enterprise Investment Scheme 11

12 How we can help We have extensive experience in advising our clients on the SEIS and dealing with all the administrative aspects. About the firm HW Fisher & Company is a commercially astute organisation with a personal, partnerled service aimed at entrepreneurial small and medium-sized enterprises, large corporates and high-net worth individuals. Our tax team includes seven partners, five tax principals and more than 40 staff specialising in both corporate and personal tax. Our corporate tax services include tax planning, corporation tax advice, share valuations, and advising on corporate transactions including mergers and acquisitions. The tax partners and staff are practical, hands-on practitioners, and are experienced in negotiations with HMRC at the highest level. We also provide personal tax advice for a great many clients on a wide range of issues including capital gains tax planning, inheritance tax planning and flexible remuneration schemes. The wider firm is a multi-faceted group with specialist companies active in corporate finance, financial services, property, and mergers and acquisitions. For more information, please contact: Brian : Lindsey T E blindsey@hwfisher.co.uk Jamie Morrison T E jmorrison@hwfisher.co.uk Toby Ryland T E tryland@hwfisher.co.uk Andrew Jones T E akjones@hwfisher.co.uk The Seed Enterprise Investment Scheme 12

13 HW Fisher & Company Business advisers A medium-sized firm of chartered accountants based in London and Watford. Related companies and specialist divisions: Fisher Corporate Plc Corporate finance and business strategy FisherE@se Limited Online accounting and back-office services Fisher Forensic Litigation support, forensic accounting, licensing and royalty auditing FIAC (Fisher IT Asset Consulting) Software and Hardware Asset Management, contract and supplier review, license and audit defence Kingfisher Collections Royalty administration and collections services for IP owners Fisher Partners Business recovery, reconstruction and insolvency services HW Fisher & Company Limited Advisers to small businesses and start-ups Stackhouse Fisher Limited Specialist insurance services Eos Wealth Management Ltd Intelligent wealth management and financial services VAT Assist Limited UK VAT representative London office Acre House William Road London NW1 3ER United Kingdom T +44 (0) F +44 (0) E info@hwfisher.co.uk Watford office Acre House 3-5 Hyde Road Watford WD17 4WP United Kingdom T +44 (0) F +44 (0) HW Fisher & Company and HW Fisher & Company Limited are registered to carry out audit work in the UK and in Ireland. A list of the names of the partners of HW Fisher & Company is open to inspection at our offices. Fisher Forensic, Fisher Okkersen, Fisher Partners, Fisher Performance Improvement, Fisher IT Asset Consulting, FIAC and Kingfisher Collections are trading names of specialist divisions of HW Fisher & Company, Chartered Accountants. HW Fisher & Company Limited, Fisher Corporate Plc, Fishere@se Limited, Fisher Forensic Limited, VAT Assist Limited, Eos Wealth Management Limited and Stackhouse Fisher Limited, are related companies of HW Fisher & Company, Chartered Accountants. HW Fisher & Company and HW Fisher & Company Limited are not authorised under the Financial Services and Markets Act 2000 but are regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. They can provide these investment services only if they are an incidental part of the professional services they have been engaged to provide. Fisher Corporate Plc is authorised and regulated by the Financial Conduct Authority under reference Eos Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority under reference Stackhouse Fisher Limited is an Appointed Representative of Stackhouse Poland Limited who are authorised and regulated by the Financial Conduct Authority under reference HW Fisher & Company is a member of the Leading Edge Alliance, an alliance of major independently owned accounting and consulting firms that share an entrepreneurial spirit and a drive to be the premier providers of professional services in their chosen markets. This guide has been produced with the intention of providing general information. It is a summary of the tax legislation and practice as at June The information is given for guidance only and is not a substitute for personalised, professional advice. All liability is excluded for loss or damages that arise as a result of any person acting or refraining to act in reliance upon any information appearing in this guide. HW Fisher & Company 2015 Print date: February All rights reserved.