TAX-EFFICIENT FUNDING FOR SMEs

For many start-up or small-medium sized companies, 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.

Struggling with cashflow at the moment? Raising finance is key!

So how can you make that investment just a little more attractive?

Tax

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 which may help your business attract those valuable investors.

Options

1. Enterprise Investment Scheme (EIS)

This investment may offer the following tax advantages:

• A tax reducer of 30% x their investment (up to £1m, or £2m if considered a ‘knowledge intensive company’).

• An option to carry back the tax reducer by 1 tax year, if more beneficial.

• If the investor has incurred a gain on another asset, they may be able to defer this gain to a later date, to assist with cash flow.

• If the investor claimed the tax reducer and the shares were owned for at least 3 years, any gain is exempt from Capital Gains Tax (CGT) on eventual disposal.

• If the disposal results in a loss, this is allowable as a reduction against their net income.

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.

Olivia Pryer Tax Adviser olivia.pryer@etctax.co.uk

How can a company offer an EIS investment?

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 fulltime 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.

Risk-to-capital Condition

It must be reasonable to conclude that:

- The company plans to grow and develop its trade on a long-term basis

- There is a significant risk of a loss of capital (greater than the return on the investment).

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.

2. Seed Enterprise Investment Scheme (SEIS)

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:

•The tax reducer available is 50% x their investment (up to £100k).

• If the investor has incurred a gain on another asset, they may be able to exempt the gain entirely.

How can a company offer an SEIS investment?

For a company 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 fulltime 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. How can you apply for EIS and SEIS Advanced Assurance?

Most investors will require advanced assurance that the company 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.

Summary

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 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.