Business consultants are urging the government to increase investment limits for Seed Enterprise Investment Scheme (SEIS) companies.
Accountants Baker Tilly claims the £150,000 SEIS investment limit over three years leaves many start-up firms without the cash to call in professional advisers.
As a result, many entrepreneurs have to decipher complicated qualification rules to remain in the scheme and many fail to do so because they lack tax and business experience.
The firm has made the point in response to a recent HMRC consultation reviewing how SEIS has worked since being introduced in April 2012 as part of Chancellor George Osborne’s effort to stimulate the economy.
According to HMRC, more than 2,000 new companies have taken advantage of millions of pounds of funding that would otherwise be denied to them.
SEIS gives investors income tax and capital gains tax breaks for taking an equity stake in a new company.
If the business grows during the three-year life of the scheme, the investor can take their profits from selling shares tax-free.
Should the investment fail, they pick up loss relief to offset against other income.
Baker Tilly argues that the funding threshold stops SEIS companies from paying for expert advice, and as a result, some companies inadvertently fail because they break the scheme qualifying rules.
These rules lay down several qualifying rules, such as limits on the value of company assets and the type of business activity they can undertake.
“We have suggested to HMRC that this lack of professional advice increases of a company making inaccurate or incomplete claims,” said the firm’s consultation response.
“It would seem easier to life the investment limit to let firms have extra funds to take the best advice as it’s a cost-effective measure for the HMRC compliance team as well.”
The consultation papers included several suggestions for changing SEIS rules, such as:
The proposals set out include:
- Applying an age limit to companies taking part in SEIS
- Changing the funding limit
- Introducing convertible loans to SEIS companies
- Excluding low-risk investment opportunities
HMRC also suggested the proposals could be extended to Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) as well.
“Acting for smaller companies looking for listing on London’s Alternative Investment Market, we can see they must have SEIS, EIS or VCT investment to grow as they are unattractive investments for traditional bank and institutional sources of funding,” said the report.