BKL tax specialist Stephen Deutsch looks at the introduction of the Seed Enterprise Investment Scheme in April 2012. This article was originally published in UK200Group Talking Tax (October 2012, Issue 88).
George Osborne’s autumn statement in 2011 announced that the
tax incentives for individuals investing in small businesses would
be greatly improved. Enterprise Investment Schemes and
Venture Capital Trusts were due for a revamp as from 6 April
2012 but, on the same date, their little brother, called the Seed
Enterprise Investment Scheme (SEIS) was to be introduced.
Draft legislation was subsequently published and the provisions
for SEIS formed part of the Finance Bill (now Act) 2012.
The headline relief is very attractive but, needless to say, there
are a number of hoops to be jumped through. If the conditions
are satisfied, the investor will receive income tax relief, capital
gains tax exemption and capital gains tax deferral. The income
tax relief is 50% of the amount invested in the year it is made,
regardless of the investor’s marginal rate. The capital gains tax
exemption is achieved by the shares, acquired through the SEIS
investment, being exempt from tax and the capital gains tax
deferral applies because assets disposed of, in 2012/13, where
the proceeds are used for an SEIS investment, are not subject to
tax, up to the level of the investment. This is described as a
deferral but as long as SEIS relief is not withdrawn or reduced,
for any reason, within 3 years from the investment, it becomes a
capital gains tax exemption and the deferred gain is cancelled.
The conditions are:-
- The investment must be in ordinary shares of a company.
- An investor can only invest £100,000 in a single tax year,
spread over a number of companies if they wish. - An investor, together with his associates, cannot control
more than 30% of the company’s capital. - A company must be unquoted.
- A company must not have already raised capital under
any other scheme, such as the Enterprise Investment
Scheme. - A company can only raise a maximum of £150,000 in total
via SEIS investment. - A company must be a UK company and have a
permanent establishment in the UK. - A company must have fewer than 25 employees. If it is a
group company, this limit applies to the whole group. - A company’s trade must be less than 2 years old.
- A company must have assets of less than £200,000.
- A company must be carrying on an approved trade. Very
basically property investment is excluded, as is farming
and legal or accountancy services.
With the potential for tax relief of 78% (income tax 50% and
capital gains tax 28%) upfront, SEIS is designed to attract
investors but, as usual, one has to be careful that “the tax tail
does not wag the dog”. A bad investment is still a bad
investment, even if it has a tax sweetener. It will still be a case
of hunting for a good investment and taking the tax
advantages as a bonus.
The aim of SEIS was said to be to stimulate entrepreneurship
and kick start the economy. The writer has not seen much of
this but these are still early days – the legislation is only just
over 6 months old.