Tax-Friendly UK Startup Scheme Extended to 2014

Kate Jackson, explains how social dining and Digital Mission delegate, TableCrowd took advantage of the Enterprise Investment Scheme (EIS) and its sibling SEIS to secure investment.

Hoorah for the announcement that Capital Gains Tax (CGT) exemption for investments in SEIS companies will be extended.

EIS and SEIS are tax relief schemes designed to encourage investment into early stage, high-risk businesses. A high number of technology and digital startups fall within this catchment and should pay close attention to the benefits. The CGT exemption is now valid until the end of 2014. 

I have direct experiences of EIS with my own start-up, TableCrowd, and made it my business to have a solid knowledge of the scheme. The rules under SEIS are intended to mirror and complement the pre-existing rules under EIS, and although once your startup has taken in investment under EIS, it is not subsequently possible for a qualifying investment under SEIS, it is possible and expected the other way round.

Under EIS, income tax relief is available at 30% for investments after 6 April 2011 (previously it was 20%). This means that on a £100k investment, the investor is entitled to £30k tax relief to set against income tax to be paid in the year of the investment. 

Alternatively, the relief can be carried back a year meaning a potential income tax rebate from the Inland Revenue in respect of income tax already paid. Under SEIS, the rate is higher at 50%, but it’s not all roses. 

Investment is capped both in terms of how much SEIS qualifying investment a company can raise (£150k in total versus 5m per year under EIS), and the upper limit an individual investor can invest and still qualify under the scheme (£100k per year versus £1m per year under EIS). 

Also, there is no carry back facility under SEIS for the period preceding 2012/13 as this is when the new relief kicked in. It is questionable whether £150k is sufficient funding - another possible impediment.

CGT relief is two-fold. Gains generated from the sale of EIS and SEIS shares will be free of CGT providing they are held for the qualifying period (currently 3 years). Secondly, under EIS, investors can take advantage of CGT deferral relief, meaning a gain from the sale of a property for example can be deferred by reinvesting the gain into an EIS qualifying company. For example, you sell a second property and the uplift in value is £100k, leaving a £28k CGT liability - for a high rate taxpayer. If you then invest £100k into an EIS company within the qualifying time period, you can forget about paying that CGT bill until you sell those shares – if that ever happens. 

Under SEIS, the government has stepped up their game on these rules; it’s not a deferral but an exemption. Those gains never come back into charge and the recent extension to this rule means it applies to gains in 2012-2014, and not just 2012-2013, which was originally the case.

The rules on loss relief remain the same, meaning that if it all goes belly up, your investors can claim loss relief to set off against income tax on their remaining exposure.

On the one hand, it’s an amazing tax incentive, which could encourage investment into startup businesses in the UK, but on the other, it is a complex, under-exposed initiative littered with restrictive caveats. 

I have met few lawyers or accountants with a solid understanding of all the rules and how they fit together, which is why on many occasions I have found myself trawling through over 100 sections of the Income Tax Act (ITA) 2007. 

Once a business has negotiated this and achieved the Holy Grail of an advance assurance for EIS (or SEIS) from the Inland Revenue, it’s worthless if the company steps into one of the many traps which cause it to fall outside compliance. There is an ongoing responsibility to investors to ensure this doesn’t happen.

There is hope the scheme will go mainstream - providing its structure and terms actually work for the businesses and investors it was designed to help.

Photo (cc) 401(K) 2013