New rules on the way for Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) will restrict the way companies can raise money from investors.
As soon as the finance bill following Chancellor George Osborne’s Summer Budget receives royal assent, these changes will come into effect:
- Any SEIS or EIS investment must have the intention of growing a business
- Investors must be independent from the company at the time of the first share issue
- Investment companies with less than 50% of turnover averaged over five years must show they are knowledge intensive and time limits will be set for their first commercial sales
- Investment limits of £20 million will be set for qualifying companies – but this is reduced to £12 million for knowledge intensive companies
- Buying existing companies with EIS funds will stop
- The employee limit for knowledge intensive companies will rise to 500
Tighter focus
The Chancellor’s aim is to tightly focus venture capital funding on businesses with the potential for high-growth and to offer the generous tax breaks that come with SEIS and EIS to investors willing to take chances with their money.
The changes are aimed at wealthy investors who have speculative cash available as tax relief on pension contributions is whittled away.
Those earning more than £210,000 a year will only have an annual pension contribution allowance of £10,000 a year from next year, so a 50% income tax refund on the value of a SEIS or EIS investment becomes an attractive feature when they are paying 45% income tax on earnings that cannot be funnelled into a pension.
Investment limits
Capital gains tax reliefs on the growth of shares and selling assets to raise cash for a SEIS/EIS investment and loss relief are also massive tax perks for high earners.
Essentially, a successful SEIS/EIS comes with little cash risk with the income tax and CGT tax breaks going in, while investors take less of a hit on an unsuccessful venture with loss relief coming out.
The drawback is SEIS has a low upper investment limit of £100,000 a year and performance of existing schemes is difficult to assess as the three-year rule for holding shares means little data is available as the scheme only started in April 2012 and the first incubator start ups are only just ready to emerge.
There is a lot of mis-information here, for example the investment limit is the wrong way round, i.e. reduced to £12m apart from knowledge intensive where it is £20m.