If you are starting a new business and need to raise some funding for the company or indeed you are AN Investor looking to invest in a new business, then in the article below we give you two very important reliefs, these are Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), both are discussed briefly below.
1.ENTERPRISE INVESTMENT SCHEME (EIS)
The enterprise investment scheme (EIS) was introduced to encourage new equity investment in trading companies by providing tax incentives to investors. These incentives take the form of an income tax reduction, a Capital gains tax exemption and a Capital gains tax deferral.
Any company which carries on a qualifying activity and has a permanent establishment in the UK can issue shares under the EIS. A qualifying activity comprises the carrying on of a qualifying trade, the preparation for carrying on such a trade or the research and development for use in such a trade. There is no requirement for the company to be incorporated here. Additionally, any investor with a UK tax liability qualifies for EIS relief regardless of whether he is UK resident. Both of these measures were designed to help to attract foreign investors into the UK .This scheme is not generally available to company directors or employees, nor investors who hold more than 30% of the company’s ordinary shares. But it can be advantageous for smaller investors.
There are two main reliefs investors can benefit from, but to do so in full they must hold their shares for at least three years.
An investor who qualifies for the relief can claim an income tax reduction equal to 30% of the money invested. The relief is subject to an annual investment limit of £1,000,000.
Capital Gains Tax
Provided an investor holds on to their shares for three years, any gain made when they sell those shares will be exempt from capital gains tax.
There are also various conditions a company must meet, including that it must be carrying on a qualifying trade on a commercial basis.
Qualifying trades exclude those involved in the following commercial areas:
coal or steel production
farming or market gardening
legal or financial services
running a hotel
running a nursing home
generation of electricity, heat, gas or fuel
In addition, the company being invested in must not be listed and must have gross assets of no more than £15 million before the investment was made.
The other Incentive Scheme:
2.SEED ENTERPRISE INVESTMENT SCHEME (SEIS)
This scheme is only available to small start-ups that have not been actively trading at any time two years before the shares are issued. The company must also have fewer than 25 full-time employees. Investors who are employees of the company cannot benefit from SEIS, but existing or new directors in the company are eligible.
As for EIS, shares must be held for three years from issue to benefit from the full income tax and capital gains tax reliefs, and no investor can hold more than 30% of the company’s ordinary share capital.
An investor who qualifies for the relief can claim an income tax reduction equal to 50% of the money invested, subject to an annual investment limit of £100,000.
Capital Gains Tax
Where income tax relief is available for an investment in SEIS shares, broadly any capital gain realised on a disposal of the shares will also be exempt from Capital Gains Tax.
There are various conditions that a company must meet. These include that the company must be carrying on a qualifying trade on a commercial basis, the company must not be listed and must have gross assets of no more than £200,000 before the investment.
The company can only raise a maximum of £150,000 under the scheme. Funds raised under SEIS must also be used by the company in its qualifying activity within three years.
It is also worth noting that companies can only raise a maximum of £5 million in aggregate under the EIS, the SEIS, the Venture Capital Trust Scheme and certain other state aid investments annually.
Permanent Establishment (PE)
A company has a PE if one of two tests in articles 5 and 7 of the OECD model treaty are met:
· It has a fixed place of business in the UK, through which the business of the company is wholly or partly carried on.
· It has a dependent agent who habitually exercises authority in the UK to do business on behalf of the company.
A fixed place of business includes:
· A place of management
· A branch
· An office, factory or workshop
· An installation or structure for the exploration of natural resources, a mine, well or quarry).
· A building site or construction or installation project.
If a non-resident company appoints a single employee in the UK, that employee’s home may be a fixed place of business for the employer. An employee may also be an agent: this depends on the nature of their activities. There is an exemption from these rules if the activities are ‘preparatory or auxiliary in character’.
The following would not generally be considered to be establishment PEs:
A facility used solely for:
· The storage, display or delivery of goods
· Maintaining a stock of goods for storage, display or delivery
· Maintaining a stock of goods for processing by another business
Having a UK website does not, by itself, mean that a non-resident company has a fixed place of business in the UK.
For EIS and SEIS, the qualifying conditions for a company are :
To qualify for the EIS scheme the issuing company must be:
· A qualifying trading company or the parent of a trading group: most trades qualify but ‘excluding activities’ include property development, farming and market gardening, coal and steel production, hotel and nursing home operation and management, and many financial activities.
o From 6 April 2016 all energy generation activities are also excluded.
o Qualifying business activities for the purposes of EIS extend to research and development which is intended to lead in to a qualifying trade.
o This also includes the creation of own intangible assets such as ‘know how’
· Unquoted at the time of the share issue. This means the company cannot be listed on the London Stock Exchange or any other recognised stock exchange. The Alternative Investment Market (AIM) is not treated as a recognised market under EIS rules.
· A ‘small company’. Gross assets cannot exceed £15 million (£7 million before April 2012) before the share issue, or £16 million (£8 million before April 2012) immediately after.
· A company that employs fewer than 250 (50 before April 2012) full-time employees at the time of the share issue.
· Not in financial difficulty at the time the shares are issued.
· Not controlled by another company.
· Not have any subsidiaries that are not qualifying subsidiaries (broadly a 51% subsidiary not controlled by anyone else, special rules apply to property managing subsidiaries).
· Have a permanent establishment in the UK.
A SEIS company must:
· Have less than 25 employees
· Have gross assets of less than £200,000
· Have been trading for fewer than 2 years
· Not have raised any money from EIS or VCT investors
· Carry on a genuine new trade.
· Have a permanent establishment in the UK.
· Not use the funds raised to acquire shares in another company or, from 18 November 2015, the trade and assets of another entity.
The information contained in this article is for general information purposes only and does not constitute advice, Whilst we endeavour to keep the information up-to-date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability for a particular purpose. We recommend that professional advise should be taken from a suitably qualified expert before undertaking any action.