Recently, new conditions were introduced to ensure the SEIS and EIS schemes are kept in line with their primary intention to encourage investment in early-stage higher risk trading companies.
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) were designed to help companies raise money to help by offering tax reliefs to individual investors who buy new shares in a company.
The following briefly outlines some recent changes to the EIS and SEIS schemes that aim to keep these schemes in line with their original goal of encouraging investment in early- stage higher risk trading companies - but do remember there are a number of other existing requirements. We strongly recommend that you get in touch with your advisors to discuss the schemes and the full range of conditions that currently apply.
Risk-to-capital (RTC)
Companies will now have to meet an over-arching condition before considering whether it meets any other conditions to be a qualifying company. The RTC was designed to deter tax planning using a low-risk investment. It is a principle-based condition taking a reasonable view on the risk level of the investment.
RTC is divided into two parts:
- The first part looks at the company’s objectives to develop and grow its trade over the long term. Indicators of growth include plans for increasing over time the revenue of the company, customer base and number of employees.
- The second part looks at whether at the time of investment, there is a significant risk that the investor will lose his investment. This is determined by considering the risk of losing the money invested (i.e. risk the business will fail commercially) and net investment return to the investor (e.g. is the investment protected by an assured capital repayment).
Advance assurance application (AAS)
Some investors want comfort their investments are eligible for the generous tax relief. AAS was designed to provide companies, who are unsure of their eligibility, with such certainty. To reduce speculative applications, changes were made on the level of information a company is required provide to HMRC.
The AAS must now be accompanied by details of investors or the promoter as well as a business plan and financial forecasts. The disclosure does not however bind those individual investors or the promoter in any way.
Knowledge intensive companies (KIC)
A knowledge-intensive company is where, at the time of the investment, the company meets at least one of the two operating costs conditions (a percentage of its relevant operating costs are spent on research and development or innovation) and at least one of the innovation conditions (exploitation of intellectual property created within 10 years of the investment) and the skilled employees condition (holds a relevant higher education qualification e.g. Master’s degree or above).
The limits for KICs are higher than for non-KICs. These include:
- KICs can raise up to £10 million per annum (£5 million for non-KICs).
- The maximum annual EIS entitlement for investors are £2m for KICs (£1 million non-KICs).
- The number of employees threshold for KICs is increased to 500 employees (250 for non-KICs).
- The aggregate lifetime amount of investments a KIC may raise is £20 million (£12 million for non-KICs).
Companies and investors would do well to see if their trade and investments fall within the conditions for KIC.
This article only sets out the recent changes and does not include the other conditions relevant to the SEIS and EIS schemes. Please do get in touch with the tax team at DRG Chartered Accountants to discuss the EIS and SEIS schemes in greater detail.
DISCLAIMER: This information is for guidance only, and professional advice should be obtained before acting on any information contained herein. We will not accept any responsibility for loss to any person as a result of action taken or refrained from in consequence of the contents of this publication.
