The Joy of Tax (reliefs)
Now, I am no tax advisor and certainly not one to want to talk too much about tax. But for businesses out there looking to supercharge their growth, it is important to have a basic grasp of some of the tax reliefs available to investors. Then you can see if your business qualifies and take advantage of it.
Think about this from the point of view of the investor – and by that I mean someone who has made a few quid and has some spare cash which he, or she, wants to make a return from. In the UK, it is surprising quite how much the Government now influences these decisions through their policy making. A few years ago property was the number one place to put some spare cash – it was all the rage to leverage up and build a small buy to let property portfolio. George Osbourne made this much less attractive with higher stamp duty charge for 2ndhome buyers and took away the mortgage tax reliefs. And with pension contribution allowances much reduced and ISA allowances quite small, and interest rates at all time lows, where do investors look to put their spare cash?
The good news for everyone is that the Government is generous in the ways it encourages investors to put their money into businesses. The acronyms you need to get to know are EIS and it’s younger sister SEIS. A huge amount of early stage investment in the UK is done via these schemes, so let me give you a brief explanation of each one (note: this should be considered advice – consult an accountant if you are considering using either of these as an investor or a company).
Enterprise Investment Scheme (EIS)
A company can raise up to £5m via this route in any 12 month period and each investor can invest up to £1m per year. For the company to qualify the main conditions are that it is an unquoted company with gross assets less than £15m, has less than 250 employees and is less than 7 years from its first commercial sale. Some trades are not qualifying such as legal and accounting services or those consider asset-backed (farming, property development etc).
For the investor, income tax relief of 30% is available and there is no capital gains tax in the future if sold at a profit. Also downside protection is given if the investor losses the investment.
For example, if an investor invests £10,000 in your company, he can immediately claim back £3,000 of income tax on his next tax return. If things go well and he sells his shares at a profit in the future, then no capital gains tax will be payable. On the other hand, if the company goes bust, he can claim back 40% (or 45% for top rate payer) on the £7,000 at risk, so a further £2,800 tax relief. Meaning £4,200 is the total “at risk”.
So, you can see why this is attractive and, if an investor is comparing two investments – one with EIS and without, no doubt he will go for the EIS option.
Seed Enterprise Investment Scheme (SEIS)
The ”S” stands for Seed as this really applies to very early stage companies, but it could equally stand for Supercharged. For the investors there are some incredible tax reliefs available: 50% income tax relief on the amount invested, a further 50% relief against any capital gains tax owed in the current year and no capital gains tax on future capital gains if the business does well. Again downside protections are given too.
Of course, this supercharged tax relief is available because the type of companies eligible for SEIS tend to be riskier. The company must be relatively young i.e. no more than 2 years trading, have less than 25 employees and no more than £200,000 in assets. It can only raise up to £150,000 via SEIS.
For example, if an investor invests £10,000 in your company, he can immediately claim back £5,000 in income tax relief on the next tax return. On top of that, if he had made a capital gain in the last year, the a further 10% (or £1,000) can be claimed back against that. As per EIS, there is downside protection so a further £2,000 can be claimed if the company goes bust. i.e. total “at risk” on a £10,000 investment is £2,000. And no capital gains tax if it’s sold at a profit in the future. What’s not to like about that?
So where’s the joy?
Not only can you receive investment directly from individual investors under these schemes but there are also many investment funds which gives investors the tax breaks when they invest in the fund, and the fund then invests in the companies, thereby giving the investors some diversification. There is a plethora of EIS funds in the market and a growing number of SEIS funds. Venture Capital Trusts (VCT’s) are another tax relief scheme which operates via funds which invest in companies, giving similar tax breaks to investors as EIS.
I have only given a brief overview of these schemes and there are, as you may imagine, many more rules to be considered – check out the information on HMRC’s website for EIS and SEIS. But they are very attainable and if you are seeking to access investment from an angel investor, High Net Worth or an early-stage investment fund, then it will be a major consideration for them so it’s worth taking some time to explore.