18-07-12

Seed Enterprise Investment Scheme Comes Into Force

 

Royal Assent for the Finance Bill 2012 (“Finance Act”) was granted on 17 July 2012 meaning that the provisions of the Finance Act have now come into force. Amongst other things, the Finance Act contains the legislative framework for the Government’s initiative to encourage investment in small, new companies – the Seed Enterprise Investment Scheme (“SEIS”).  Announced in the Budget 2012 by Chancellor George Osbourne, it is hoped that SEIS will help provide much needed finance for start-up businesses by offering extremely generous tax savings for investors.
 
The highlights of the tax reliefs available under the SEIS regime are:
 
- individuals making a qualifying investment will get income tax relief equal to 50% of the amount invested;
 
- individuals will be able to use the relief against their income tax liability for the tax year in which  the shares are subscribed for, the preceding tax year or a mixture of the two;
 
- provided that the shares are held for the minimum relevant period of three years and the SEIS conditions have been met throughout that period, any disposal of those shares will be exempt from capital gains tax (“CGT”); and
 
- where an individual disposes of any capital assets during the 2012/2013 tax year, any chargeable gain arising on such disposal will be exempt from CGT if the individual makes an SEIS qualifying investment equal to the gain (or part of the gain) in the same tax year. 
 
The SEIS tax benefits effectively help underwrite some of the risk of an investment in a new venture.  For example, a potential investor with assets planned for disposal could raise the maximum annual SEIS subscription limit for individuals of £100,000 and invest that money through an SEIS qualifying investment.  The investor’s income tax bill would reduce by £50,000 and with £28,000 saved in CGT by way of the exemption only £22,000 of the £100,000 investment is left at risk.
 
In order to be an SEIS qualifying investment:
 
- the company must be undertaking or planning to undertake a new “qualifying trade” (less than two years old), have a permanent establishment in the UK, have fewer than 25 full-time employees and gross assets (excluding liabilities) of £200,000 or less at the time of investment;
 
- in addition, the company must not be a member of a partnership or be controlled by another company, nor can it control another company (other than qualifying subsidiaries) and the shares in the company must not be listed on the London Stock Exchange or other recognised investment exchange (the AIM and PLUS markets are not regarded as recognised investment exchanges for the purposes of SEIS); 
 
- neither the investor nor any of his associates may be an employee of the investee company at any time during the three year period commencing on the date that shares are issued nor can the investor or his associates hold between them, indirectly or directly, or be entitled to acquire, more than 30% of the ordinary share capital, issued share capital or voting rights of the investee company or be entitled to more than 30% of the assets on a winding up; 
 
- the shares must be fully paid up ordinary shares with no present or future preferential rights to cumulative dividends, assets on a winding up or as to being redeemed; and
 
- any monies raised must be spent by the third anniversary of the date of issue of the shares.
 
Provided that a company qualifies for SEIS, the scheme will apply to shares issued on or after 6 April 2012.  SEIS reliefs may be claimed when at least 70% of the money raised from the qualifying investment has been spent by the company for the purposes of the qualifying business activity (although it is possible to claim the CGT exemption before SEIS income tax relief has been given).  
 
Unfortunately, there are some limitations.  Firstly, an investee company can only raise £150,000 in total through SEIS.  This is an absolute rather than an annual limit.  Second, the company must not have received any investment from a Venture Capital Trust or issued any shares under the Enterprise Investment Scheme (“EIS”) regime.  However, it is possible for an EIS qualifying investment to take place after an SEIS funding round provided that the company has spent 75% of the SEIS monies raised.  
 
As with EIS, investors and companies should not forget that reliefs can be clawed back and/or lost if the company ceases to meet the qualification criteria during the relevant period.  
 
Now that Royal Assent has been granted, the Small Companies Enterprise Centre (part of HMRC) will be able to provide an advance assurance facility enabling companies to submit details of their fund raising plans, their structure and their activities in advance of an issue of shares, so that the SCEC can advise on whether or not the proposals are likely to qualify for SEIS relief. 
 
Only time will tell whether the generous tax benefits available under SEIS will provide the desired shot in the arm for new enterprises.  Some critics have noted that the £150,000 ceiling is too low to be a financially viable method of raising money once professional costs are factored in and have highlighted the possible conflict between investors competing to secure the SEIS reliefs rather than being a subsequent investor through EIS, or worse, through no scheme at all.  Coupled with the fact that SEIS may not be around for long, the fastest moving investors may potentially benefit the most.  However, notwithstanding the mitigated investment risk, any proposed investment should only be made after a careful due diligence exercise has been undertaken in the ordinary course.  Private company start-ups remain a risky investment with no liquid market for the disposal of shares. 
 
For further information on SEIS, please contact Chris Coates or James Hardy 
Article by Chris Coates