Tax breaks for investors are huge, but check out the small print!
Are you a start-up enterprise or an SME that needs funds for expansion? How close are you to securing your investment? Before going ahead, check out this article. The Enterprise Investment Scheme can give great tax breaks to your investor, but … and it’s a big ‘but’, the process might not be all plain sailing. Read on and make sure you and your investor are up to date with the small print.
Prior to the financial crisis of 2008, virtually anybody could get a bank loan. The big banks were making a fortune from what are now seen as irresponsible lending practices. Of course, it all went wrong, and now it’s much tougher to access mainstream finance, especially for young, unproven businesses.
Perhaps you have a business idea with real promise, but you’re being held back by lack of finance. Or maybe you’ve been in business for a while, but need funds to take things to the next level – you need a new plant, machinery, IT or facilities.
At first glance, the tax benefits to your investor look really appealing:
up to 30% income tax relief on the amount invested (subject to a maximum investment of £1 million in any tax year)
the opportunity to match the investment to capital gains and defer paying the capital gains tax (CGT) until the EIS shares are sold exemption from CGT on the EIS shares if they are sold at a gain
automatic share loss relief if they are sold at a loss.
These tax breaks are indeed attractive, reducing the overall risk for your private investor. But there are conditions – and it will save much time and hassle, if you and your investor can make yourselves aware of these conditions before finalising the arrangement. At the time of investment, your company
CONDITIONS FOR YOUR COMPANY
mustn’t be on the list of excluded activities e.g. shipbuilding and farming.
must employ fewer than 250 Full Time Equivalent employees. (A full time employee counts as someone working 35 hours per week. So 2 part-time staff, each working 17.5 hours count as a single full time employee).
mustn’t have gross assets of more than £15 million. After the investment, they mustn’t exceed £16 million. Your company can raise up to £5 million in each tax year. If the gross assets are close to the limit, and there are multiple investors, look carefully to see if the post-investment £16 million limit will be breached. This will cause all the investors’ claims to fail.
must meet the risk-to-capital conditions, namely
(i) its goal is to show long-term growth
(ii) there’s a significant risk that the investor could lose more of the capital invested than the value of any tax relief or returns on the investment.
To satisfy point (i), all that’s needed is a business plan or prospectus setting out plans for growth.
CONDITIONS FOR YOUR INVESTORS
How ‘connected’ are your investors to your company in the two-year period leading up to the investment. The definitions of the term ‘connected’ are complex and revolve around the percentage of share capital owned.
Do your investors hold Director status? Are they paid or unpaid? Is their remuneration deemed to e ‘reasonable’? One way to remove doubt is to make sure the appointment of your investor as a Director only takes place following the investment. Either way, it’s vital to check out these elements before proceeding with the investment.
EARN YOUR INVESTOR 50% TAX RELIEF WITH SEIS
Think of SEIS as the baby brother of EIS. If your company is very small, and less than two years old, your investor can enjoy a small bonus, by structuring the investment into two parts – £100,000 under SEIS and the rest under EIS. A qualifying SEIS investment gives relief at 50% rather than 30%, so could save the investor £20,000.
One condition is that the company mustn’t have raised any money under any of the venture capital schemes (including EIS) previously.
As you can see, there are tremendous incentives to attract investors into your business. But, you’ll also appreciate how complex some of the conditions are. So, the key message is – take care. Don’t attract investment that becomes unattractive through lack of research and planning.
Never take any decision without checking first with the tax experts at Most Money. If in any doubt, call us. After all – we’re here to help!
This legal information is not the same as legal advice and you may not rely on our post as a recommendation of any particular legal understanding. Please, consult an attorney if you’d like to get advice on your interpretation of this article.