Chapter 28 The Enterprise Investment Scheme Flashcards
enterprise investment scheme, carry back relief and qualifying company
Enterprise Investment Scheme – tax relief is restricted to the lower of the amount subscribed or £1 million, unless there is investment in a knowledge intensive company (which is £2 million). The relief is given by way of a tax reducer at a flat rate of 30%. The tax reducer cannot create a negative figure for the tax liability.
Carry back of relief – it is possible to carry back an EIS subscription to the preceding tax year, providing the limit for relief was not exceeded in that earlier year.
Qualifying company – tax relief only given if subscribed to a qualifying company. The company must be a trading company, companies whose activities are primarily financial are excluded as are companies providing legal and accountancy services. Farming, market gardening, hotels, property development, shipbuilding, coal and steel and energy trades are also excluded. The company must have a permanent establishment in the UK. The company must be unquoted when the shares are issued (not marketed to the general public on a stock exchange). The company must not be a 51% subsidiary or under the control of another company. The assets of the company must not exceed £15 million of assets before the share issue and must not exceed £16 million after the share issue. Companies must not have more than 250 or more full time employees. There is a lifetime limit of £12 million (£20 million for knowledge intensive companies) on the amount of funds that can be raised through relevant investments. The share issue must take place within 7 years of the first commercial sale. The company must carry on the trade at least 4 months after the subscription of shares.
relevant shares, qualifying investor, risk to capital, clawback relief
Relevant shares – the shares must be ordinary shares and not carry preferential rights to assets on winding up. The shares must be issued and subscribed for, for genuine commercial reasons and not for tax avoidance schemes or arrangements.
Qualifying Investor – the investor must not be connected with the company in the period beginning 2 years prior to the issue of the shares and ending 3 years after the issue. The investor is connected with the company, if they or an associate (associates include spouses and ancestors or descendants) is an employee of the company. An employee includes a director, but there are special provisions which allow a director of a company to be eligible for EIS relief. A director can obtain relief if he is an unpaid director in the period 2 years before the share issue and 3 years after the issue and he was not connected to the company before the share issue and he becomes a paid director after the share issue but any remuneration he receives is reasonable taking into account the services rendered. The investor is also connected if he holds more than 30% of the ordinary shares.
Secondly there is a restriction preventing existing shareholders claiming relief. The individual must not hold any shares in the company at the date of issue unless the shares already held were acquired as part of an issue which qualified for income tax relief under the EIS/SEIS/SITR provisions or the shares already held are subscriber shares.
Risk to capital – this is the final condition to see if the shares qualify for EIS relief. It must be reasonable if the objectives of the company are to grow and there is significant risk of a loss of capital greater than the return on the investment, considering the value of the EIS relief.
Clawback relief – if the investor disposes of his shares within three years of issue there will be a clawback of the income tax relief. If the investor gives away his shares within three years all the income tax relief originally obtained will be withdrawn. If the shares are sold to an unconnected third party, the income tax relief to be withdrawn is the sale proceeds multiplied by the initial rate of relief obtained. The clawback of income tax relief cannot exceed the original tax reducer. Full relief will also be withdrawn if any of the qualifying conditions cease to be met during the 3-year period.
SEIS and SEIS conditions
Seed Enterprise Investment scheme – relief calculated at the lower of the amount subscribed or £100,000, tax reducer at 50%. The claim for SEIS relief can be made 5 years after the 31 January following the end of the tax year. Like EIS a disposal of shares within 3 years will result in a clawback.
SEIS conditions – SEIS company cannot have more than £200,000 of assets before the share issue, less than 25 employees. The money raised by the company must be spent on qualifying business activity. An individual cannot be connected to the company, a director of an SEIS is not classed as being connected whereas being an employee is.
