For many start-up or small-medium sized companies (SMEs), attracting investors can be a long and daunting process, particularly during economically uncertain times.
To ask investors to part with their precious money and put their confidence into your business plan can present a difficult task.
Though not an ‘attractive’ word, it can be a significant factor for choosing where to place your money.
By offering investors the chance to take advantage of a number of generous tax breaks, this could be the driving factor which steers them to taking a leap of faith in your company.
Below we have discussed two tax-advantaged funding methods (EIS/SEIS) which may help your business attract those valuable investors.
This investment may offer the following tax advantages:
All the above are subject to conditions met by the investor and the company.
It can also help your company raise money of up to £5 million each year, and up to a maximum of £12 million in your company’s lifetime.
Firstly, the company must be unquoted and have a permanent establishment in the UK.
It cannot operate a prohibited trade, such as financial, farming, market gardening, hotel and property development.
The assets of the company must not exceed £15 million prior and £16 million after the share issue (the focus is on smaller-medium companies).
The company must employ less than 250 full-time employees (500 if knowledge intensive company).
The issue must take place within the first 7 years of its first commercial sale (10 years if knowledge intensive company).
The cash raised must be used for the trade within two years.
It must be reasonable to conclude that:
The main objective of the relief is to focus on companies with high growth potential. This condition is in place to prevent EIS availability to companies who aim to preserve their invested capital.
There are also a number of conditions that the individual must meet to take advantage of the relief. For example, they cannot be connected with the company, and must hold their shares for at least 3 years.
There are various other conditions that should be considered. We recommend that if your company is considering implementing one of the schemes, please get in touch to discuss it with a professional tax adviser.
A slightly smaller version of the EIS scheme, more focused on incentivising smaller start-ups who wish to raise funds of up to £150,000.
They offer the same tax advantage with some subtle differences:
For a company (SMEs) to qualify, the conditions are very similar to EIS with the below main differences to note:
The assets of the company must not exceed £200k prior to the share issue.
The company must employ less than 25 full-time employees.
The cash raised must be used for the trade within three years.
The qualifying activity must be a trade no more than 2 years old.
Again, the risk-to-capital is another particularly important condition which applies.
Most investors will require advanced assurance that the company (SMEs) they are investing in is eligible for EIS or SEIS funding.
Therefore, an application should be submitted to HMRC before your company starts offering it out to investors.
During the application process, HMRC will require the details of at least one proposed investor. They will also require the company’s business plan, 3-year financial forecast, a copy of the latest accounts and a range of other documents.
These tax rules are complicated, detailed and as can be anticipated, strictly interpreted and enforced by HMRC.
Although many conditions have been noted above, there are further conditions which can be difficult to interpret, both for the investor and the company.
Here at ETC Tax, we are well versed in helping clients navigate through these rules.
We can assist potentially eligible companies (SMEs) in obtaining the necessary assurances that any investment received may qualify for EIS/SEIS and continually ensure that this is case.
Furthermore, we can also structure investments so that individuals may maximise their individual reliefs available to them.
If you are a company or individual who would like to discuss the above schemes in more detail and explore how these might apply to your business, please do not hesitate to get in touch.
