For EIS and SEIS purposes a company needs to meet a number of requirements at the time of accepting investment and, unless specified otherwise must continue to meet these requirements for a period of at least three years.
What requirements must the company meet?
The trading requirement
A company must exist wholly for the purposes of carrying on a ‘qualifying trade’, ignoring any insignificant or incidental activities.
A qualifying trade is one which is conducted on a commercial basis with a view to profit and doesn’t consist to a substantial extent of ‘excluded activities’. There are a number of ‘excluded activities’ including: dealing in land and financial instruments, dealing in goods otherwise than in the course of an ordinary trade of wholesale or retail distribution, certain financial activities, receiving royalties or licence fees other than where the company has created the whole or greater part (in terms of value) of a relevant intangible asset, legal or accountancy services, property development, farming, forestry, operation of hotels or nursing homes, subsidised generation of electricity and the provision of services to another business carrying on excluded activities where a person holds a controlling interest in both the company and the business to which services are being provided.
If the company has any subsidiaries, they must all be ‘qualifying subsidiaries’. A qualifying subsidiary is one in which more than 50% of the ordinary share capital is owned (directly or indirectly) by the company issuing the shares.
Control and independence
The company cannot be controlled by another company.
UK permanent establishment
The company must have a permanent establishment in the UK. Permanent establishment is defined for the purposes of EIS and SEIS and is different to the wider meaning for Corporation Tax.
Use of money raised
For EIS – the company must employ the money raised for a qualifying purpose within two years.
For SEIS – the company must spend the money raised for a qualifying purpose within three years; the term ‘spend’ is technically different to ‘employ’ used in the EIS rules.
The company’s gross assets (or if it has qualifying subsidiaries the assets of the group) must not exceed:
- For EIS – £15,000,000 immediately before the issue of EIS shares and £16,000,000 immediately thereafter.
- For SEIS – £200,000 immediately before the issue of SEIS shares.
Numbers of employees
The company (or if it has qualifying subsidiaries the group) must have less than:
- For EIS – 250 employees at the date of issue of the shares.
- For SEIS – 25 employees at the date of issue of the shares.
- Some specific additional conditions for a company seeking SEIS status include:
- The company must be carrying on, or intending to carry on, a new qualifying trade. That is a trade which is the first trade of the company and that begins no earlier than two years before the share issue.
- A company can’t have raised money via the EIS or from a Venture Capital Trust before.
SEIS and EIS Tax Relief Key Points
The government has created two schemes of generous tax reliefs for business investors. The EIS was introduced in 1994 and followed its predecessor the Business Expansion Scheme. The scheme is designed to help small and medium sized businesses raise equity investment by offering investors a range of tax reliefs.
The SEIS was introduced in 2012 to focus additional tax incentives on early stage micro businesses.
EIS and SEIS Key Points for Consideration:
- The schemes apply to investment in companies, and not to sole traders, partnerships or limited liability partnerships.
- The amount that a company can raise under the EIS is up to £5,000,000 in any 12 month period. For SEIS the overall limit is effectively £150,000.
- Both schemes offer a range of tax reliefs to investors.
- Investment must be in shares of the company and not by way of any form of debt (under current law).
- Companies who wish to use the schemes can apply to HMRC for advance assurance of EIS and/or SEIS status prior to accepting inward investment.
- There are a range of conditions that an investee company must satisfy.
- There are a range of conditions that an individual investor must satisfy.
The tax incentives offered under the EIS and Seed EIS are very attractive. The use of the schemes is restricted by various limits and qualifying criteria. The rules are complex and many of the rules require compliance for at least 3 years post investment.
If you would like more information on both these scheme, then contact Martin Samuel firstname.lastname@example.org