The SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme) schemes provide valuable tax incentives for investors who subscribe to shares in particular companies. These reliefs make fundraising for newer and smaller companies much easier as the investor’s downside risk is mitigated and upside benefit is exempt from Capital Gains Tax. There is also an income tax break for the investor at the point of investment.
As most highly beneficial tax breaks, the rules and both complex and extensive; with plenty of conditions for both the company and its investors.
There are a number of areas in which companies commonly have problems and these are often inadvertent consequences to wider commercial drivers. The team of experts at Gravita has both the experience and knowledge to prevent these from becoming a problem for your company.
Advance Assurances
There is a misconception that an advance assurance (granted by HMRC) is a “guarantee” that investors will get their tax break. An assurance is essentially HMRC giving an opinion that the company is “likely” to be able to issue shares under (S)EIS.
However, each investor will need to satisfy various “investor requirements”. It is also possible that a company will qualify but an investor will not.
In order to an assurance to have any value, to either the company or its investors, it as good as the information provided to HMRC. If full facts are not disclosed to HMRC, or if there are any changes between the granting of an assurance and the date shares are issued, an assurance could be rendered meaningless.
A common example is where the original assurance application includes a set of company Articles of Association but new Articles are prepared, after an assurance is granted, and the rights attached to the classes of shares changes.
It should also be noted that an assurance granted for a particular round of investment does not necessarily mean that future rounds are covered / protected.
Preferential Share Rights
Prior to the creation of any new class of share, professional advice should actively be sought by the company to establish whether the new class of share could impact the existing shares’ (S)EIS position.
(S)EIS shares must not carry any present or future ‘preferential rights’ to dividends, or assets on the company’s winding up, over any other class of share. This requirement must be satisfied for a minimum of 3 years following the date of issue of shares, or in the case of EIS, up to the end of the 3 years following the date of commencement of trade, if later.
Care must therefore be taken when creating a new class of share or amending the rights attached to existing shares as it is easy to inadvertently create a right that would be caught by this trap.
This is especially challenging, although by no means impossible, if you are creating growth shares or other share incentive schemes for employees. These often utilise shares which are partially or fully excluded from income, capital or voting rights.
Group Restructuring
There are independence requirements which state that the company issuing shares must not be a subsidiary of another company nor must it be under the control of any other company. There is also a preclusion on there being “arrangements” in place under which this condition would be breached.
It is common for companies to restructure their affairs as they evolve. Group structures can normally be created without triggering liabilities to tax due to the “share for share” provisions.
For capital gains tax purposes, the share exchange transaction should not trigger any tax liabilities so long as the transaction is being affected for bona fide commercial reasons and does not form part of a tax avoidance scheme or arrangement.
There are also Transactions in Securities provisions which impose a tax charge where there is a transaction involving securities (which includes shares), and a person receives an income tax advantage as a result.
Clearance can be sought from HMRC to provide some reassurance on these points.
Whilst we would always recommend that the above clearances are obtained, there is no obligation to do so for the purposes of capital gains tax and income tax.
However, when doing this for an (S)EIS company, obtaining the “share for share” clearance is mandatory and if a group restructure is implemented without having obtained this clearance, (S)EIS relief may be withdrawn.
Summary
(S)EIS is a very complex area of legislation and innocuous errors, to achieve wider commercial goals, can result in investors losing their tax breaks. Where this happens there is often significant damage to the relationship between the investors and the company.
Specialist advice should be taken before undertaking any activities of the types described above in order to protect both the company and its investors.
What next?
To discuss the contents of this article in more detail or any other tax matter, please speak to Parminder Chattha or Toby Hermitage.
