Complicated red tape can see investors lose valuable tax breaks offered by companies in the Seed Enterprise Investment Scheme (SEIS), according to experts.
Investors are lured to SEIS by the promise of up to a £50,000 income tax rebate on an investment of £100,000 in a start-up company.
Growth on shares is also exempt from capital gains tax. If the company fails, investors can also pick up tax relief to temper their losses.
A similar deal is offered by the Enterprise Investment Scheme (EIS), but at lower rates on larger investments.
The problem, say experts, is that the rules that govern SEIS and EIS are so complex that breaking them is easy.
Tax relief clawed back
If investors or companies are in breach of the rules, HM Revenue and Customs (HMRC) can claw back tax reliefs already paid or stop investors from claiming them.
Matthew Eady, director of share schemes and reward and employment tax at Cambridge accountancy firm PEM, claims rule changes introduced in recent months have made investing in SEIS or EIS much more complicated.
Cambridge University is a leader in developing spin-off start-up companies that raise funding from the two tax schemes.
“For some investors, the tax breaks make all the difference whether to put money in a company or not,” he said.
“If they knew they might lose this incentive, then they probably would not have invested at all.”
Rule changes affecting investments
Eady argues that the investment rules are complicated because SEIS and EIS are considered state aid under European Union laws.
“This often leads to a hitch with claiming tax relief,” he said. “The legislation is a minefield for unwary investors and entrepreneurs. HMRC can deny tax relief completely or claw back what has already been granted.”
Two of the main issues involve companies more than seven years old looking for EIS status and investors increasing their shareholding.
“In both cases, recent rule changes have made working under the rules harder for investors and companies while presenting a trap for the unwary.
“For those that qualify for the tax relief, SEIS and EIS are terrific incentives to invest but the rules changes can make this difficult to achieve.”
