The Seed Enterprise Investment Scheme Helping fledgling companies raise equity finance
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 purchase new shares in those companies. It is an extension to the existing Enterprise Investment Scheme (EIS) and will offer significant tax relief to investors in higher-risk small companies. SEIS is intended to recognise the particular difficulties which very early stage companies face in attracting investment, by offering tax relief at a higher rate than that offered by the existing EIS. SEIS relief applies to shares issued in qualifying companies from 6 April 2012. The forecasted end date at present is 5 April 2017 but the Government can seek EU approval to extend the relief. 2 The Seed Enterprise Investment Scheme
Income Tax Relief An individual can subscribe for a maximum of 100,000 of ordinary share capital in a qualifying SEIS company and obtain a tax credit of 50% to offset against their tax liability in the fiscal year of investment or that of the prior year. For any investment made in the 2012/13 year, it is not permitted to carry back the tax relief to 2011/12. Investors require sufficient tax capacity - that is to say - they must have paid sufficient tax which can be offset by the tax credit. If an investor has, say, a tax liability for the year of 20,000 and makes an investment of 100,000, only 20,000 relief will be given and the balance of 30,000 will be wasted. In order 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. The first is that any growth in value of the SEIS shares themselves will escape a charge to capital gains tax on disposal of those shares. The second is that, for the 2012/13 tax year only, if a qualifying SEIS investment of 100,000 is made capital gains of up to 100,000 can be matched against this investment and fully exempted from a charge to CGT. It does not matter in what order the disposal of the original asset and SEIS investment occur, the only condition is that they both occur in 2012/13. This exemption relief goes further than the ordinary CGT deferral available under the EIS scheme as the gains exempted will not come back into charge when the SEIS shares are sold. www.hwfisher.co.uk 3
Again, the shares must be held for a minimum of three years in order to benefit from the CGT relief and a claim must also have been made for income tax relief in respect of the SEIS shares acquired. Any relief given where the shares are sold within three years of acquisition will be clawed back. Inheritance Tax Relief Once SEIS shares have been held for a minimum of two years, Business Property Relief will apply to the shares which will exempt those assets from Inheritance Tax as those shares will qualify for 100% Business Property Relief. Example of available tax relief Harry sells an asset and realises a capital gain of 100,000. Harry has paid sufficient income tax to utilise the income tax relief available and decides to reinvest 100,000 into SEIS shares. After three years Harry sells the shares for 120,000, realising a gain of a further 20,000. The following tax relief will have been generated (Ignoring annual exemptions): Income tax relief: ( 100,000 x 50%) = 50,000 Capital gains tax exemption ( 100,000 x 28%) = 28,000 Inheritance Tax relief* ( 100,000 x 40%) = 40,000 Capital gains tax relief ( 20,000 x 28%) = 5,600 Total tax relief EIS generated 123,600 *On disposal of the shares, reinvestment into further qualifying assets will be needed if Business Property Relief is to remain available. 4 The Seed Enterprise Investment Scheme
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. However, shares may carry limited preferential rights to dividends, but may not include rights where either: Preferential rights attaching to the share include scope for the amount of the dividend to be varied based 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 pre-existing arrangements for the shares to be sold at the end of the relevant period at the point of subscription. 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. www.hwfisher.co.uk 5
Qualifying conditions Investor Investors can subscribe for SEIS shares directly or via a nominee. Investors 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 in a winding up. In calculating whether an investor has a substantial interest in a company, the shareholdings of associates are taken into account in arriving at the 30 per cent figure. 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, investors cannot be an employee of the company at any time during the period from 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 be deemed to 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 up to 1,000. 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. This rule will not apply to bona fide commercial investments. 6 The Seed Enterprise Investment Scheme
Qualifying conditions investee company Prior to the shares being issued, 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 in existence when the shares were issued. AIM, the PLUS-traded and PLUS-quoted markets are not considered to be recognised stock exchanges 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 in gross assets. If the company is the parent company of a group, that figure applies to total of the gross assets of the group, although inter-group debt is ignored for this purpose. The company must not have previously raised any other Venture Capital Trust (VCT) or EIS finance. The company cannot raise more than 150,000 in total under SEIS and this figure must also include any other State Aid received by the company in the three years preceding the relevant share issue according to EU regulations. If the relevant issue of shares takes the total over 150,000, then the excess will not qualify for relief. Any trade being carried on by the company when the relevant shares are issued must be less than two years old at that date. That condition applies whether the trade was first begun by the company or whether it was first begun 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. www.hwfisher.co.uk 7
In addition to these criteria applying at the point SEIS investment is sought, there are further conditions which must apply 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 may have subsidiaries, but if it does they must all be subsidiaries in which the company has more than 50 per cent of the ordinary share capital and which are not controlled (by other means) by any other 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 any specified period of time. However the company issuing the shares should be clear about what the intended qualifying trade is, and that 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. 8 The Seed Enterprise Investment Scheme
Qualifying conditions Use of Funds Within three years of the date of the relevant share issue, all the monies raised by that issue must be 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 ensure that investors lose their status, but the condition will be considered to 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, providing that the monies are thereafter used by a 90 per cent subsidiary for the purposes of a qualifying business activity. Most importantly, the payment of dividends to shareholders is not regarded as being for the purposes of a qualifying business activity. A qualifying business activity is either: carrying on a new qualifying trade; or the activity of 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. www.hwfisher.co.uk 9
Qualifying conditions Qualifying trade A qualifying trade is one which is conducted on a commercial basis with a view to the realisation of profit. Not all trades qualify for SEIS purposes and HMRC have published a list similar to that for EIS purposes of trades that are considered excluded activities. If a trade consist 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 any 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 EIS or market gardening; holding, managing or occupying woodlands, any other forestry activities or timber production; shipbuilding; coal production; steel production; 10 The Seed Enterprise Investment Scheme
operating or managing hotels or comparable establishments or managing property used as an hotel or comparable establishment; 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 will attract a Feed-in Tariff, unless generated by hydro power or anaerobic digestion, or unless carried on by a community interest company, a co-operative society, a community benefit society or a National Insurance industrial and provident society; 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) and the SCEC will confirm whether the proposals will meet the SEIS conditions. To formally apply for SEIS status, the company will need to complete 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 seeking SEIS status. There is a time limit of the fifth anniversary from 31 January following the year in which the shares were issued in which to seek SEIS clearance. HW Fisher & Company is not authorised by the Financial Services Authority but is able in certain circumstances to offer a limited range of investment services to clients because we are a member of the Institute of Chartered Accountants in England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. This brochure has been produced with the intention of providing general information only. While reasonable care has been taken in its preparation, no responsibility is accepted by HW Fisher & Company for any errors it may contain. Coverage of topics is not necessarily comprehensive and does not purport to give specific professional advice. All examples used in this brochure are for illustration purpose only. You should contact the firm to obtain specific professional advice on how the information contained in this brochure will apply to your personal circumstances. All liability is excluded in respect of any loss or damage that may arise in connection with the use of or reliance upon any materials and information appearing in this brochure. www.hwfisher.co.uk 11
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 Fisher Okkersen International specialist film audit service provider Kingfisher Collections Royalty administration and collections services for IP owners Fisher Partners Business recovery, reconstruction and insolvency services Fisher Property Services Limited Property investment, management and finance Jade Securities Limited Business divestments, mergers, management buy-outs and acquisitions Stackhouse Fisher Limited Specialist insurance services Eos Wealth Management Ltd Intelligent wealth management and financial services VAT Assist Limited UK VAT representative www.hwfisher.co.uk London office Acre House 11-15 William Road London NW1 3ER United Kingdom T +44 (0)20 7388 7000 F +44 (0)20 7380 4900 E info@hwfisher.co.uk Watford office Acre House 3-5 Hyde Road Watford WD17 4WP United Kingdom T +44 (0)1923 698 340 F +44 (0)1923 698 341 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 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 Property Services Limited, Jade Securities 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, HW Fisher & Company Limited and Jade Securities 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 Services Authority under reference 193921. Eos Wealth Management Ltd is authorised and regulated by the Financial Services Authority under reference 543025. Stackhouse Fisher Limited is an Appointed Representative of Stackhouse Poland Limited who are authorised and regulated by the Financial Services Authority under reference 309340. 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. If you would like to subscribe / unsubscribe to our publications, please email info@hwfisher.co.uk This brochure is printed on Essential Velvet recycled paper. HW Fisher & Company 2012. Print date: August 2012. All rights reserved.