Seed Enterprise Investment Scheme Update

Entrepreneurs looking at exploiting opportunities using the Seed Enterprise Investment Scheme (SEIS) are being advised on how to properly set up their company to benefit from tax relief.

Smith & Williamson, a London law firm, raised investor fears over the issue with HM Revenue and Customs (HMRC) and in a reply they confirm that, as the law stands, HMRC cannot apply discretion in how the law is applied.

Essentially, the issue centres around the wording of the Finance Act 2012 which requires that the SEIS issuing company must not be under the control of any other company and that ‘Period A’ begins with incorporation and ends immediately before the third anniversary of the date on which the SEIS shares are issued.

Unfortunate legislation

This means that those companies which have been set up by formation agents – which have used corporate entities to hold the initial subscriber shares – are unsuitable for SEIS purposes.

HMRC points out in the letter to Smith & Williamson: “We’re legally obliged to apply the legislation as it stands, irrespective of whether that gives an unfortunate result.

“If this legislation works in an unfortunate way then the solution is to change the legislation in a Finance Bill which HM Treasury and HMRC will consider if we have evidence that it is causing significant problems in practice.

“At present, it’s not clear to us that ‘most businesses’ will in fact use a formation agent; our experience is that significant numbers of new incorporations are established directly by their founders via the Companies’ House website.”

HMRC SEIS investment tips

HMRC is now offering this advice to SEIS investors and their agents:

• Don’t set companies up with a controlling corporate shareholder
• If an existing company hasn’t started trading when SEIS1 is submitted, then close the non-qualifying company and start a new company – even if the investors in both companies are exactly the same
• If an existing company is already trading and is now seeking its first investment from third party investors who will be the first people to seek SEIS relief, then investors should transfer the trade to a new company so that the new investors don’t lose their relief under S257FP. (S257FP is only an  issue if the investors seeking relief are those who previously owned more than a half interest in the trade
•  If none of the above is possible, make do with 30% income tax relief; CG deferral and disposal reliefs; scope for share loss relief on up to 70% of investment; and inheritance tax business property relief

However, it is looking likely that there will be a change in the law in the next Budget to help clarify the situation.