If you want to attract investment to your company, remember HMRC offers generous tax incentive schemes to your investors – Enterprise Investment Scheme (EIS) is designed to help qualified smaller, higher-risk companies raise capital by giving tax relief to investors. An individual investor can invest up to £1,000,000 in any tax year and receive 30% of the amount invested as tax deduction of their income tax bill. Seed Enterprise Investment Scheme (SEIS) is an even more generous scheme, and it offers 50% tax relief on any amount invested up to £100,000. The maximum a company can raise through SEIS is capped at £150,000, however.
Both the investors and companies have to meet certain conditions to qualify for the schemes.
Conditions for investors
- Investors must hold the shares for a minimum of three years, if investors have claimed tax relief and sold the shares before the three-year period runs out, the tax relief will be withdrawn
- Shares must be full-risk ordinary shares, and there must be no arrangements for the shares to be sold at the end of the relevant period
Extra benefit for investors
- There is a ‘carry back’ facility which allows the all or part of the cost of shares acquired in one tax year, to be treated as though those shares had been acquired in the preceding tax year, giving more flexibility to reduce investors’ tax bill
- Capital gain tax exemption: on top of the tax relief on income tax, any gain from selling the shares after the minimum holding three year period is exempt from Capital gain tax
Conditions for companies
Most trades qualify, but some do not. If your company falls into one of the below listed trades, your company is conducting “excluded activities” and is not qualified. Mostly commonly, if your company is
- property development
- providing legal or accountancy services
- 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
- dealing in land, in commodities or futures in shares, securities or other financial instruments
- financial activities such as banking, insurance, money-lending, debt-factoring, hire-purchase financing or any other financial activities
- leasing or letting assets on hire, except in the case of certain ship-chartering activities
- farming or market gardening
Applying for EIS/SEIS
Since the EIS/SEIS is administered by HMRC, If you have started the application process or secured approval from HMRC before you present your pitch to potential investors, it will certainly increase your chance of securing the investment.
To start the application process, submit plans to raise money to HMRC through advance assurance scheme, they will advise on whether or not the proposed share issue is likely to qualify. Form to fill is FormEIS(AA), with guidance to fill the form VCM14040.