When it comes to Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS), some rules are open to some interpretation, whereas others are set in stone. Being aware of the areas where most common pitfalls relating to the schemes exist (and where problems typically arise from) can help ease some company directors' anxiety.
- Submitting compliance statements
Companies that qualify for SEIS and EIS can raise investment under schemes at any point within the age condition, i.e., two years = SEIS, seven years = EIS, ten years = Knowledge Intensive Companies (“KIC”) EIS. However, a SEIS and EIS compliance statement can only be submitted to HMRC when the company has been trading for four months or has spent 70% of the monies raised under the schemes. This means a company and investor will have to wait until either of these events occurs before investors can claim their tax reliefs. Directors should be aware the date the company begins trading can be open to interpretation. It not only means when the company first made its first sale but also when the company started to market the product or service or when the software's beta version became available.
- Full-risk shares
All SEIS and EIS shares must be full-risk ordinary shares. It doesn't matter what class the shares are; however, there must be no preferential terms. There can be no attempts to reduce the investors' risk, meaning no liquidation or redeemable rights.
- Issuing SEIS and EIS share
When it comes to issuing SEIS and EIS shares, there are three matters directors should be aware of and follow:
- SEIS and EIS shares cannot be issued on the same day. If a company issues SEIS and EIS on the same day, only one scheme will be available to the company. This can result in understandably angry shareholders as only either the SEIS or EIS investors will get their tax reliefs. In contrast, the other scheme's investors will have invested in a risky company without incentives such as income tax relief or loss relief.
- SEIS and EIS shares must be paid for in full before any shares can be issued. For SEIS and EIS shares to be qualifying, the money should be in the company's bank account before an issuance occurs. HMRC will need to see the investment entering a company's bank account and look at the date to ensure the money was in before the shares were issued.
- Do not wait several months from the date the investment came and the date the shares were issued. If the money enters the company's bank account and the shares are issued six months later, HMRC may consider this a loan rather than an investment, meaning investors will not get any tax reliefs. It is recommended that shares are issued as soon as the investment is received.
- Non-UK company
Companies that are not incorporated in the UK can still avail of SEIS and EIS. However, they must meet the permanent establishment condition, along with the other qualifying conditions. A non-UK needs to have either:
- a fixed place of business in the UK through which your company's business is wholly or partly carried on or
- an agent in the UK who has the authority to enter into contracts regularly on behalf of your company.
Directors should be aware that a UK subsidiary does not allow a company/group to meet the permanent establishment condition. If the non-UK Topco has both a UK subsidiary and a UK branch, the activities conducted at the non-UK entity and the branch must be distinctive and different from each other.
- Employees and Family members
Investors who intend to invest in a SEIS or EIS company must not be "connected" to the company. The investor or an associate must not be an employee of the company. Associates include business partners, trustees, spouses, civil partners, parents, children, etc. However, siblings are not included in this definition and can avail of SEIS and EIS.
These are only some of the most common pitfalls associated with the Seed Enterprise Investment Scheme and Enterprise Investment Scheme; it is always recommended to be cautious throughout the time a company utilises the schemes. If you have any questions or any other SEIS or EIS concerns, we are happy to help.