Do you need tax-efficient finance for your company? Well, HMRC’s new guidance for businesses wanting to attract investors to purchase stock in their firm has recently been released. Investors may potentially benefit from a number of lucrative tax incentives if the arrangement is structured properly and the firm satisfies EIS or Seed EIS criteria.
Because of the EIS, the firm may raise up to £5 million each year, with a ceiling of £12 million in total throughout its existence. This also includes money raised from other venture capital programs. Within seven years after the company’s first commercial sale, it must receive investment under a venture capital program.
The issuing company’s size is crucial since it and any qualifying subsidiaries must:
- The company’s assets must not exceed £15 million before any shares are issued, and it must not exceed £16 million after the shares have been issued.
- The number of full-time equivalent employees at the time the shares are issued must be less than 250.
The investment must satisfy the “risk to capital” standard, which states that it must:
- The purpose of the investment is to aid in the company’s growth and improvement.
- the investment must be a risk to the investors’ capital.
‘Growth and development’ implies that the firm will utilize the cash to expand its revenue, client base, or staff.
Understand how UK businesses can navigate HMRC self-assessment forms and optimize tax incentives for growth.
Complicated Scheme Rules
There are several more complicated scheme rules that must be followed in order for investors to qualify for and retain EIS tax reliefs concerning their holdings. If the participants and the firm do not follow the regulations for three years or longer after the investment is made, tax benefits will be withheld or revoked.
Before shares are issued, it’s a good idea to get an Advance Assurance from HMRC declaring the firm an “EIS qualifying business.”Â
The Seed EIS (SEIS) is intended to encourage small business investment and, like EIS, provides a variety of tax incentives for people who buy fresh shares in a firm. When the SEIS shares are issued, the company must not have been operating for more than two years.
Only the first £150,000 of share capital raised by a firm is eligible for Seed EIS relief. However, this can be integrated into a larger share offering, which qualifies for EIS relief up to a £5 million annual limit.
 The investment incentives, like EIS, will be deducted or taken away from investors if the regulations are not followed for three years after the investment was made.
There is a condition that the firm is an unquoted company engaged in, or preparing to conduct, a qualifying trade at the time the shares are offered.
The business and any of its affiliates must also satisfy these additional criteria to qualify for Seed EIS:
- has gross assets of more than £200,000 when they’re created.
- is not a part of a partnership.
- has fewer than 25 full-time workers in total when the shares are issued.
Like EIS, it is necessary to obtain Advance Assurance from HMRC, certifying that the firm is a qualifying business before the shares are issued.
Navigate complex tax reliefs and investment schemes to maximize benefits, whether claiming employment expenses or raising seed capital.
Tax Breaks for EIS Company Investors
Investors who are not connected with the firm can get income tax relief of 30% of their investment in qualifying EIS firms each year (or up to £2 million if at least £1 million is invested in knowledge-intensive companies) up to a maximum of £1 million. As a result of the £10,000 deposit, the investor’s income tax liability would be reduced by £3,000.
The tests for connected persons are difficult. Directors can’t get EIS tax relief if they’re a paid employee of the firm at the time the shares are issued – but they may after their investment under the “business angel” rule.
If you’ve held the stock for at least three years, the income tax savings are kept and any profit on the sale of the shares is exempt from capital gains.
It’s also possible to postpone capital gains on any sale by reinvesting the money in qualifying EIS stock.
Tax Breaks for SEIS Company Investors
Investors who are not affiliated with the firm may qualify for income tax relief of 50% of their investment, up to £150,000 in each tax year, if it is qualifying SEIS firms. As a result of this, an investment of £10,000 might save the investor £5,000 in income taxes.
The connected persons’ tests are difficult and resemble the EIS regulations; nevertheless, directors may qualify for SEIS tax deductions.
The income tax relief is preserved, and any profit on the shares’ disposal would be exempt from capital gains tax provided that they are held for at least 3 years.
SEIS investors should note that 50% of the money put in may be used to offset capital gains earned in the year. As a result, a £10,000 investment would save an investor £5,000 in taxes and £5,000 on their income tax bill.
Clear House Accountants are experts in tax planning for small businesses. We will help you understand how these schemes work and how your business can benefit from them. Contact us today to learn more about the SEIS or EIS schemes and how we can help you take advantage of them.
