Fail SEIS but secure EIS
- Helen Curtis
- Updated: Mon, 16th Jan 2017
We met with a client who had just heard about the Seed Enterprise Investment Scheme, SEIS. He hoped he could essentially double his £60,000 investment in a start-up due to the 50% SEIS income tax relief on the cost of shares. We set our client on the right path to investment.
Our client had already loaned the business £60,000. The conversion from loan to equity would not meet the requirements for SEIS.
We proposed that the company use the funds invested by other third parties under SEIS to repay the £60,000 loaned by our client. Once repaid, our client could use the money to subscribe for newly issued EIS shares and secure tax relief.
The earlier in the process investors are aware of EIS or SEIS relief, the more likely they will benefit from these tax reliefs. For a genuine third party investment, early consideration of SEIS may save the investor over 50% in income tax relief. EIS investment tax relief is also available for larger, longer established companies with income tax relief at 30%.
The process we applied
We took our client through the qualifying criteria for SEIS.
We discussed the SEIS requirements:
- Is the Company unquoted? Yes, check.
- Does the Company have fewer than 25 employees? Yes, check.
- Does the Company have less than £200,000 in gross assets? Yes, check.
- Has the Company had any investment from a venture capital trust? No, check.
- Is the trade of the Company less than two years old? Yes, check.
- Is the Company UK resident? Yes, check.
- Does the trade fall within the list of excluded activities? No, check.
- Will the Company receive less than £150,000 in total under SEIS? Yes, check.
It started to look very hopeful. The Company was very keen to complete the SEIS Advance Assurance Form then submit it to HMRC. Unfortunately there are more hurdles. We discussed the complex substantial interest rules. An SEIS investor must hold less than 30% of the shares, including “Associates” shareholdings. Associates are business partners and relatives, but not siblings.
The SEIS rules are complex, as the Government sought to limit SEIS relief to genuine outside investors who finance high-risk start-ups. The rules prevent an obvious wheeze: a reciprocal arrangement where two shareholders invest in each other’s companies to obtain tax relief.
No SEIS relief for liquidation of loan
Then the bombshell hits: Our client, the investor, has already loaned the Company £60,000, and was expecting to be able to convert that loan into equity.
The share issue in consideration for the liquidation of a loan, or the ‘conversion’ of loan stock would not raise money for the company. Therefore the shares would not be issued for a qualifying business activity. The shares would be in exchange for a pre-existing arrangement, i.e. the loan. Hence no SEIS tax relief.
The company lacked the funds to repay the our client prior to the SEIS share issue. Nor did our client wish to further increase his investment.
Had our client understood the SEIS scheme, he could have injected £60,000 into the company for equity rather than as a loan in the first place.
A practical solution
Fortunately we found a solution. Our client’s loan was for the benefit of the company’s trade. Raising cash via SEIS, and then using that cash to repay the loan, was permitted. The company could therefore use the funds invested by other third parties under SEIS to repay the original loan to our client.
When our client had been repaid, he could use the money to invest for newly issued EIS shares in a future share issue round anticipated for next year. The company could then continue to grow and attract investors via the qualifying investment schemes.
Helen Curtis is a partner in our corporate team. Helen has advised hundreds of clients who secure SEIS and EIS. Many of her clients go on to run good businesses – Helen is hands on and answers the issues that crop up along the way.
SEIS and EIS requirements are intentionally complex, so only genuine investors in gain the generous tax reliefs. Why not call or email me to arrange an informal discussion, as it is easy to make mistakes.....