The Seed Enterprise Investment Scheme (SEIS) is aimed at providing tax relief for equity raised in riskier, smaller, early stage companies which are carrying on, or preparing to carry on, a new business. Writing for UK200Group TaxTalk, BKL tax specialist Stephen Deutsch considers its scope in certain circumstances.
Q. A Limited, which carries on the business of ‘event management’ in the UK, is controlled by its management shareholders who between them hold 52% of the issued share capital. The remaining 48% of the company’s shares are held equally by three Business Angels who each obtained SEIS relief on share subscriptions of £50,000 each.
The Board has recognised an opportunity to carry on the business of ‘event management’ in Singapore and the Far East and further working capital will be required. The Business Angel investors of A Limited are willing to invest and are seeking SEIS relief for their investment.
The investment cannot be made in A Ltd, since the SEIS limit has already been reached in that company. But would they be eligible for SEIS relief if they subscribed for shares in a newly incorporated stand-alone company formed to carry on the Far East business?
A. In principle, a new company carrying on the new ‘event management’ business in the Far East (the ‘Singapore Company’) is capable of satisfying all SEIS requirements.
Note that the SEIS legislation requires the company to have a UK Permanent Establishment throughout the three year period following the SEIS share subscriptions. This condition is satisfied so long as either of the following apply:
– the company has a fixed place of business in the UK through which the company’s business is wholly or partly carried on; or
– an agent acting on behalf of the company has and habitually exercises their authority in the UK to enter into contracts on behalf of the company.
A ‘Fixed place of business’ includes a place of management, a branch, an office but would exclude premises that are regarded as ‘preparatory or auxiliary’ in character such as a storage facility. What is critical is the extent to which the activities of the fixed place of business form an essential and substantial part of the whole business.
Assuming that hurdle can be overcome, overseas “expansion” of this kind raises one other particular issue. SEIS is intended to encourage genuinely new investment in companies by outsiders. So the legislation includes a provision to deny SEIS relief where part of a trade has been “hived off” into a new separate company which is, broadly speaking, under common control with the existing company (Section 257FP ITA 2007 – Acquisition of trade or trading assets). More specifically, it will deny SEIS relief if at any time in the period beginning with the Singapore Company’s incorporation and ending three years after the SEIS investment any of the Business Angel shareholders (or any group of persons to which they belong):
– has more than a half share interest in the trade or part of the trade as carried on by the Singapore Company and also had an interest in that part of the trade when it was carried on by A Limited; or
– control the Singapore Company and controlled A Limited when it was carrying on the trade or part of the trade.
So, it is necessary first to see if there is any risk that the Singapore Company could be regarded as taking over a part of the existing company’s business. This might be the case if the existing company has previously undertaken any work in the Far East or has even undertaken exploratory work with a view to expansion there. If there is such a risk it will be necessary to be very careful with the shareholding of the Singapore Company so as to ensure that there is no group of individuals (not necessarily limited to the putative SEIS investors) which has control of both companies. For example, if the shareholdings are such that one of the Business Angels and two of the management shareholders together control A Limited and similar shareholdings are held in the Singapore Company (so that the three of them control Singapore Company), that Business Angel will be barred from claiming SEIS relief.
So long as A Limited has never carried on its business overseas, SEIS relief should be available. It should be a matter of fact that the Singapore Company’s business is a new trade and not to be regarded as a ‘part of the trade’ previously carried on by A Limited.
This article is also available via the UK200Group website.
