Raising Money or Investing? Make the Most of the Tax Reliefs Available

By Clive Hyman, chairman and CEO of Hyman Capital. 

 

There are four venture capital schemes on offer in the UK – that provide investors with attractive tax reliefs against their income tax bill.

If you’re an investor these reliefs can make a potentially risky investment less so, and as a company, if you qualify for these schemes than you will find it easier to attract inward investment.

 

The four schemes:

 

  • Social Investment Tax Relief (SITR). This allows individuals to claim relief on £1m of annual investment and provides 30% of income tax relief.

 

  • Venture Capital Trusts (VCTs) allow an annual investment of £200,000 on which they can claim 30% tax relief.

 

  • The Enterprise Investment Scheme (EIS) is for early-stage companies raising funds to help grow the business. EIS is for those seeking funding of up to £5m and gives investors 30% upfront tax relief and must have less than £15m of assets and up to 250 employees.

 

  • The Seed Enterprise Investment Scheme (SEIS) is designed to help a company raise money when it is starting to trade, or has been trading for less than two years. The businesses must have assets of no more than £200,000 and fewer than 25 employees. Businesses raising money under SEIS can receive a maximum of £150,000 through the scheme, offering private investors 50% up front tax relief – hugely attractive although the amount of investment is relatively small.

 

In this article, I am focusing on SEIS and EIS.

 

How to qualify:

 

In order to qualify for EIS or SEIS the company must be based in the UK. HMRC says proof of a company’s permanent establishment in the UK includes having an office of factory or one of the following:

 

  • a place of management
  • a branch
  • a workshop
  • a quarry, mine, oil or gas well,
  • a building site, such as a construction or installation project.

 

This is not an exhaustive list, but the type of business a company carries out will be the deciding factor in what premises and facilities are required to meet the conditions for investment.

 

Approved vs. Unapproved:

 

Two types of fund invest in companies seeking SEIS and EIS money – HMRC “approved” and HMRC “unapproved”. Both spread the risk over numerous companies which is important.

 

Unapproved does not mean the fund is dodgy. All it means is that HMRC has not given its structure prior approval. Approved does not mean “protected” or that HMRC has approved the quality of the investments – but there are tax planning differences between the two.

 

With approved funds the ability exists to “carry back” for income tax relief purposes and treat the investment as if it had been undertaken in the previous tax year.

 

Money raised by a new share issue must be spent within two years of the investment or, if later, the date the company started trading.

 

It must be used to grow or develop the business and must not be used to buy all or part of another business.

 

Qualifying:

 

Most trades qualify but there are exceptions if most of a trade includes coal or steel production, for example, farming or market gardening, leasing activities, legal or financial services, property development, running a hotel or nursing home, and electricity, heat, gas or fuel generation.

 

Apart from being established in the UK, they must not be trading on a recognised stock exchange at the time of the share issue and they must not have any arrangements in place to become quoted.

 

For start-ups, SEIS is an attractive way to target much needed funding. Just because a company has availed of SEIS funding does not mean it cannot go on to raise further funding from an EIS, although the amount it can raise from this will be reduced to up to £4.85m.

 

Companies raising money under EIS must do so within the first seven years of its first commercial sales. If you did not receive investment within the first seven years, or now want to raise money for a different activity from a previous investment, you will have to show that the money is required to enter a completely new product market or a new geographic market and that the money you are seeking is at least 50% of the company’s average annual turnover for the last five years.

 

Investors:

 

If you are an investor, you have to source the entity or entities you are going to invest in which you might do through a trusted fund manager, or you might find a corporate finance house that has an opportunity.

 

You would need to get out into the market and network, and identify what it is you would like to invest in. Investors need to look at the investments and make sure they are sound. It is all too easy to get distracted by the tax relief. The tax relief is great to have; it is obviously hugely advantageous. But what is the point of tax relief if the investment is rubbish?

 

The business still has to have the necessary fundamentals. You still have to assess it. Is the management team any good? Are the businesses you are investing in worth it? Remember it is your cash you are going to have to invest. The tax relief should not blind you to good common-sense investment practice.

 

Companies:

 

If you are a company seeking investment, you have got to get a specialist tax adviser to help you acquire the necessary approval to do so, the tax relief accreditation letter and advance assurance.

 

You have either got to market it through a fund manager or a corporate finance house to high-net-worth individuals who are qualified to look at it.

 

For most of the EIS opportunities you need an introducer or specialist finance companies that will manage everything and probably have a roster of companies for which they want to raise money.

 

You must complete a separate application for each share issue and if your application is successful, HMRC will confirm the decision and send you compliance certificates to give to your investors.

 

Your investors cannot claim the tax relief until they receive their compliance certificate.

 

Success stories:

 

Since EIS was introduced, 26,355 companies have received investment and almost £16.2bn of funds have been raised.

 

More than 1,800 of these companies raised funds under SEIS for the first time in 2015-16, representing £154m in investment.

 

 

Conclusion:

 

Investors; do your due diligence – don’t be seduced by a tax break, the investment still needs to ‘add up’.

 

Companies: get expert help. HMRC stresses that tax reliefs will be withheld or withdrawn from investors if companies do not follow the rules for at least three years after the investment is made.

 

 

ABOUT THE AUTHOR

Clive Hyman FCA is founder of Hyman Capital Services offering expertise in due diligence and managing change in business including raising equity and debt capital, mergers and acquisitions, interim management, board management and governance, deal structuring, and company turnaround. See: www.hymancapital.com

 

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