Why invest in an Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), or Social Investment Tax Relief (SITR) company?
Well along with the desire to see the start-up company succeed there is also the attraction of the healthy tax reliefs offered by such investments /blog/tax-schemes_comparison
But what should you watch out for?
We recently met with HMRC and they outlined the common pitfalls which are encountered for EIS and SEIS and SITR companies and investors.
Believe it or not, one of the reasons why companies fail to maintain their tax status is shares not being fully paid up on issue. We look at this requirement along with other failings noted by HMRC.
So shares must be fully paid on issue - this sounds like an easy requirement to meet, yet is one of the top reasons why companies fail to maintain their EIS & SEIS status, so it is important to note the key requirements:
EIS & SEIS & SITR relief is available where a qualifying company issues new shares.
The purpose of issuing these shares, and any others issued at the same time, must be to raise money for a qualifying business activity.
If Advance Assurance has been received then the company and investor will have additional confidence that the shares will qualify for EIS, SEIS or SITR tax reliefs, and will assist the company in seeking the required investment. But note that HMRC caution that you should ensure that there are no significant changes between the date of the letter of assurance and the date of issue of the shares as this could have an impact on the tax status./blog/the-seasonality-effect-of-the-seis-and-eis-schemes
The shares must be paid wholly in cash (which includes payment by cheque and other means) and the cash must be paid in full at the date of share issue.
To ensure that the 'share issue' and 'cash received' happen on the same day the company should have an operational bank account set up at the appointed date.
The shares must remain as fully paid up shares throughout relevant period. This period starts on the date the shares are issued and ends either three years after that or, if later, three years after the company starts to trade.
Shares are deemed to be issued to a person when that person's title to them has become complete. This process will be accepted as complete when the shareholding is entered in the company's Register of Members, so it is important that you, as an investor, ensure that this process has been effected.
The shares must be new, ordinary shares with no special rights attached to them.
The tax incentives are in place to attract investors into what are deemed to be the higher risk companies. The old saying is true ‘risk equals rewards’ - yes, there will be a higher than normal failure rate, but there will also be higher returns to those companies that are successful. For this reason, the shares issued to EIS, SEIS & SITR investors must not carry any preferential rights and must rank as 'bottom of the pile'.
HMRC also advised that companies are falling down in relation to SITR due to the content of their loan documentation.
SITR differs from EIS & SEIS in that investment can be made through debt finance.
Qualifying debt will generally take the form of a loan which the social enterprise has to repay along with some form of interest.
Again, due to the high risk high reward element of the tax incentive scheme, it is important that the loan, under SITR conditions, does not rank above other loans and debts of the enterprise.
As these loan agreements are a critical element of the SITR status HMRC advise that it is prudent to enclose a sample agreement as part of the Advance Assurance process.
If you are interested in EIS, SEIS or SITR investments, either as the founder of a new company or as an investor, and would like our help please contact us at Sapphire Capital Partners LLP.
We are happy to help.
Written by Violet Spence
As a manager at Sapphire Capital Partners LLP, Violet spends her days assisting clients with SITR, SEIS and EIS schemes for companies and applying to HMRC for advance assurance on behalf of clients. Contact her by email at Violet@sapphirecapitalpartners.co.uk
For further information and advice on the Social Enterprise Tax Relief, Seed EIS or EIS, please contact Sapphire Capital Partners LLP at the following:
- Office phone: 08 707 348 912.
- Email address: email@example.com