Article contributed by ACCA
Several changes to the SEIS were announced in this year’s Budget.
The Seed Enterprise Investment Scheme (SEIS) was originally announced in the 2012 Budget and included in the UK tax provisions from 6 April 2012. The scheme offers would-be investors generous tax breaks for investing in small, start-up type businesses.
The scheme is aimed at investors and entrepreneurs who will assist in developing a business that might otherwise never gain funding. It is only available to individual investors in very small companies; it is not available to investors in partnerships or LLPs. The scheme does not replace the Enterprise Investment Scheme (EIS), but runs alongside this and the Venture Capital Trust (VCT) regime.
The scheme is not permanent, but relates to shares issued from 6 April 2012 to 5 April 2017; this term may be extended by Treasury Order. The claim must be made no later than five years after the normal self assessment filing date.
The investment limit for a qualifying individual in a fiscal year is £100,000. They cannot claim tax relief until the company has spent at least 70% of the money invested.
The investor must not be an employee of the company from the date of incorporation of the company until at least three years following the issue of the shares. A director is not an employee for this purpose. They must not have a ‘substantial interest’ (more than 30% of the ordinary share capital or votes) and anti-avoidance provisions exist where there are pre-arranged exits or loan arrangements.
The investment must be in cash and must be invested in shares which are fully paid when issued. They cannot carry a preferential right to dividends, to assets on a winding up, or to redemption. They must be held by the investor for three years after issue; there will be a claw back of relief if the shares are not held for the requisite period.
The tax relief
The investor will receive income tax relief of 50% and any capital gain arising on the disposal of the shares will be exempt, provided the investor (or spouse or civil partner) held the shares for three years following the issue.
To obtain the relief:
- the company must be a new company, incorporated within the two years prior to the issue of the shares
- the shares must be issued in order to raise money for a new trade and the cash raised must be spent within the two years following issue
- the total of SEIS investments must not exceed £150,000; the limit for VCTs will increase from £2m to £5m
- the company must exist for the purpose of carrying on one or two new qualifying trades
- it must have a permanent establishment in the UK and its shares must be unquoted
- the company cannot be part of a group and must not be a member of a partnership or similar entity
- the total value of the company’s gross assets must not exceed £200,000 at the time of issue. If there is a related company the relevant proportion of the assets must be included in this total
- the total full-time equivalent employees must not exceed 25 at the time of issue; employees include directors for this purpose. The limit for an ordinary EIS scheme will increase from 49 to 249
- there must be no EIS or VCT investment in the company before the SEIS shares are issued.
Companies considering using the Seed Investment Scheme (SEIS) have the option to obtain Advance Assurance or formal clearance from HMRC Small Company Enterprise Centre (SCEC).
Before giving the assurance HMRC will consider if the company will be a qualifying company carrying out a qualifying business activity, if the shares will be eligible shares and if the money raised will be used in a manner which satisfies the rules of the scheme.
If the company wishes to rely on an assurance, the onus would be on the company to provide all relevant information, drawing attention to any particular issues which could mean that the company may not meet the requirement of the scheme when the shares are issued.
Capital gains tax deferral relief
For 2012/13 only, capital gains tax deferral relief is available on capital gains realised on the disposal of ANY asset during the year ended 5 April 2013 which is reinvested into an SEIS investment, subject to a £100,000 limit.
Changes announced in the 2013 Budget
Extension to reinvestment relief
The capital gains tax deferral relief provision has been extended to the 2013/14 tax year. Capital gains tax deferral relief is available on 50% of a capital gains realised on the disposal of ANY asset during the year ended 5 April 2014 which is reinvested into an SEIS investment, up to a limit of £50,000.
The definition of companies eligible to participate in the scheme will be extended with effect from 6 April 2013. Previously, a company had to be ‘independent’, ie it must not be under the control of another company at any time from the period between incorporation and the end of the qualifying period for the shares in question.
This restriction is relaxed slightly from 6 April 2013 so that companies which are established and controlled initially by another company will not be disqualified, providing that control exists only for a period where the company has issued only subscriber shares and has not yet begun, or begun preparing for, trading.