For high growth businesses looking for investment, venture capital schemes such as SEIS and EIS are attractive options as they give investors tax reliefs on income tax, capital gains tax and inheritance tax to offset the risk of their investment in the year of investment or as if the investment had been made in the previous year.
To qualify, your company or social enterprise (the latter being most relevant to Social Impact Tax Relief:
- have a permanent establishment in the UK
- carry out a trade that qualifies
- plan to spend the investment on a qualifying trade
- not be listed on a recognised stock exchange at the time of investment
- not be controlled by another company.
You must also meet the specific qualifying conditions of whichever scheme you opt for.
The requirements for SEIS are:
- Maximum investment £150,000 (with an increase to £250,000 announced from 6th April 2023);
- Funds raised within two years of trading (with an increase to three years announced from 6th April 2023);
- Companies must have gross assets of less than £250,000 (with an increase to £350,000 announced from 6th April 2023)
- Less than 25 employees.
The requirements for EIS are:
- Maximum investment £12m
- Funds raised within seven years of trading (longer rules exist for knowledge intensive companies)
- Companies must have gross assets of less than £15m
- Less than 250 employees.
Similar rules apply for Venture Capital Trust (‘VCT”) and (‘SITR’) SITR investments although the latter are not invested in qualifying trade but in registered charities, community interest companies or community benefit companies.
The above reflect the main rules but there are a lot of more complex requirements which is why pre approval is recommended and required by some potential investors. Various documents need to be submitted if advance assurance has not already been obtained or there have been changes to those documents since assurance was obtained. These include:
- the company’s business plan and financial forecasts,
- a copy of the latest accounts if available,
- which companies will use the investments (if part of a group), and
- details of all trading and activities to be carried out.
There are ongoing complexities with venture capital schemes that we have explained in our article Ongoing risks for venture capital reliefs such as EIS and some red flags to watch out for on application include the following:
(1) A dual SEIS and EIS round can be achieved but they normally need to be separated into two distinct investment tranches with the shares issued in chronological order and on separate days to avoid inadvertently breaching the gross assets threshold.
(2) The directors are looking at investing under the scheme. While there is a provision in the legislation for the investor to become a director of the company, this should be registered on Companies House after the shares are issued so that there was no connection at the time the investment was made. Care must be taken over remuneration paid to scheme investors by ensuring they are at market rate and not deemed to be a return of value or a type of benefit and there are risks. For EIS there is a broader restriction when directors can participate in an EIS investment, unless their pay is ‘permitted pay’ (e.g. reimbursements, dividends, commercial rent.)
(3) The funds raised are not going to be used for ordinary business activity that is for a qualifying trade. For example there are restrictions on purchasing goodwill and other intangible assets and EIS funds (unlike SEIS) cannot be used to fund existing working capital.
(4) Investors are being issued different classes of shares with preferential rights. Different voting rights can be acceptable so long as shares are on a par in terms of their economic value.
(5) The company has traded for more than two years for SEIS (three years after 6th April 2023) or seven years for EIS (additional time if qualifying as a knowledge-intensive company) when the investment is made. This definition of trading is different to the corporation tax return period for a company which usually begins prior to a company’s first commercial sale. For SEIS the trading start date is normally taken to be the date of the first sale by the business, and not when it began incurring costs. As well as the additional time for knowledge-intensive EIS companies, there are some other provisions that permit older companies accessing EIS if the product is new and the investment is over a minimum threshold test.
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