Finance Monthly Global Awards 2018 Edition

Finance Monthly Global Awards 2018 www.finance-monthly.com 44 UNITED KINGDOM What is EIS ? In broad terms EIS can be divided into three areas, SEIS (the Seed Enterprise Investment Scheme), EIS ( The Enterprise Investment Scheme) and VCT ( Venture Capital Trusts). In overview, each of these schemes allows qualifying UK taxpayers to invest in qualifying companies for a qualifying period and to obtain various levels of both income tax and capital gains tax relief. SEIS investment is available to qualifying start-up companies and allows them to raise equity (share) capital of up to £150,000, from qualifying investors, who can individually receive relief on qualifying investments of up £100,000 a year. The reliefs available to qualifying investors include an initial Income Tax relief of 50% of the investment made, plus no Capital Gains Tax on disposals after the end of a qualifying period. In addition, losses arising on qualifying investments can be offset against either Income Tax or Capital Gains Tax. EIS is a much larger relief and is designed to help smaller, high risk companies to raise equity finance. Under the scheme qualifying companies can raise up to £5 million a year ( up to a maximum overall of £12 million) in equity capital. Knowledge intensive companies can raise up to £20 million under the scheme. Under EIS, qualifying investors can individually receive relief on qualifying investments of up to £1 million ( increasing to £2 million in certain circumstances). They receive an initial Income Tax relief of 30% of the investment and as with EIS can enjoy tax free capital gains on disposals as well as full relief of losses against either Income Tax or Capital Gains Tax. A VCT is, broadly, a company, approved by HM Revenue and Customs, which subscribes for shares in qualifying companies. Investors hold shares in the VCTwhichmakes investments in a spread of qualifying small unquoted companies, thus spreading the risk to investors. Qualifying companies can raise up to £5 million a year ( including SEIS and EIS raises) from VCTs. Qualifying individual investors in a VCT receive an initial Income Tax relief of 30% of investments up to a value of £200,000, no tax on qualifying dividends received from the VCT and no Capital Gains Tax on qualifying sales of shares in the VCT. The VCT itself is exempt from Corporation Tax on dividends and capital gains arising from qualifying investments. What are the benefits, complexities and challenges arising from the EIS scheme? The benefits to investors are laid out above, the main challenge for investors themselves being to ensure that they personally qualify for relief. Qualifying companies clearly benefit from the ability to raise substantial amounts of capital from a very tax efficient source. The bigger challenges and the most complexity lie with the companies themselves. These include whether or not the following matters are satisfied, (a) Is the company too old? (b) Do the activities of the company qualify? (c) Are the activities “knowledge Intensive”? (d) Has the company received any other State Aid, if so how much? (e) Is the company part of a group which undertakes non-qualifying activities? (f) Are the proposed activities sustainable throughout the qualifying period? (g) Does the company have a pre-ordained exit strategy? (h) Is there a business plan? (i) Is there an Information Memorandum for investors? (j) Is there a shareholder’s agreement in place? In addition, many investors wish to know in advance whether or not their investment is likely to qualify for SEIS or EIS relief. HMRC have a unit which deals specifically with Enterprise scheme compliance. This unit offers an Advance Assurance Application (AAA) procedure, which allows companies to submit an application, in advance of receiving investment, for assurance that investment in new shares in the company will qualify for SEIS/EIS/ VCT relief. Applications for the assurance have to be accompanied by detailed paperwork and explanations and responses from HMRC can take many weeks. In the absence of full explanations and paperwork, HMRC might well ask detailed questions which take time to prepare, and again may take many weeks to be reviewed by HMRC. If HMRC do not issue an Advanced Assurance, (AA) this does not necessarily mean that the company does not qualify, however it means that there is less certainty for both the company and for potential investors. Additionally, there is no appeal against a refusal to issue an AA as it is a non-statutory procedure. Since 2017, obtaining AAs has become substantially more difficult as HMRC will no longer consider speculative applications, nor will they grant assurance where they believe that an investment bears insufficient risk , is effectively asset backed or where there is any suggestion of the company having determined an exit route for investors. Q Q