The UK Government offers two very attractive schemes, which encourage the UK based investors to make an investment in the companies based in the UK , called Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS).
Investors will receive Income Tax relief on the amount of they have invested, subject to certain limits, and will pay no tax (Capital Gains) on the sale of the shares after 3 years. The amounts and limits are different for EIS and SEIS and may change over time. It is essential to take expert advice before considering using these tax advantages.
In considering the implications of seeking EIS funding you should keep in mind that EIS qualifying companies have to satisfy a number of requirements at the time of the share issue and for the following three years.
When the shares are issued, the company must:
- Have gross assets of less than £15m, and no more than £16m immediately after the share issue.
- Have fewer than 250 ‘full time equivalent’ employees.
- Not be listed on a recognised stock exchange and have no arrangements in place to become quoted on a recognised stock exchange.
- The shares must be paid for in full in money on or before the date they are issued.
- The shares must not have any special rights.
- There must not be any arrangements to protect or give preferential treatment to the EIS investors.
At the time of the share issue AND for three years after the share issue, the company must:
- Be independent, that is not a subsidiary or be under the control of another company
- Conduct a qualifying trade
- Have a UK ‘permanent establishment’, though trading mainly in the UK is no longer a requirement.
There are also anti-avoidance rules to counter pre-arranged exits and any arrangements designed to reduce an investor’s risk.
Additionally, all money raised from the issue of EIS shares must be used to grow and develop the business and must not be used to make acquisitions of either another company’s shares, trade or certain types of trading asset.
There are also some activities which exclude participation in the EIS scheme. These are:
- Dealing in land, shares, futures and other financial instruments
- Dealing in goods other than in the normal course of a retail or wholesale trade
- Banking, insurance, money lending or other financial activities
- Leasing or receiving royalties or license fees, unless the company has created the intangible asset itself.
- Providing legal or accountancy services
- Farming, market gardening, woodlands and timber production.
- Property development
- Hotels and nursing homes
- The generation or production of heat, electricity, power, fuel or gas
- Coal and steel production, shipbuilding
- Providing services to a connected party conducting one of the above trades.
There are overall limits on the total amounts of money which can be raised, and the company must have
a sent in a Compliance Statement to HMRC and have received the letter of authorisation and Compliance Certificate together with a reference number, before the shares can be issued. The investors will need the Compliance Certificate in order to claim the tax relief.
As always, tax is a complicated subject and careful planning is required before acting on any arrangements. If you would like to establish a company in the UK and apply for EIS or SEIS please get in touch to set up a meeting with our Team Karolina Staniak or Marcin Boron .