Investors are urged to avoid Seed Enterprise Investment Scheme (SEIS) start-ups that lack advance approval from the tax man.
HM Revenue & Customs (HMRC) runs a pre-approval service that looks at tax compliance for SEIS companies.
If the company passes scrutiny of the share structure, qualifying trade and how money raised from SEIS will be spent, HMRC approves the application.
Investors can then trust that the company will deliver tax breaks – providing the rules are not broken during the 36 month investment term.
However, pre-approval is not compulsory and many SEIS start-ups fail to submit their plans to HMRC.
Risk for investors
Fund managers suggest that start-ups without pre-approval present more risks to investors.
“Tax relief is only available once the investment is made and the commitment is to make the investment for a fixed time, which can put tax relief at risk,” said David Newman of fund manager Viridis Navitas Capital Partners.
“The risk is that funds without pre-approval may not fulfil the qualifying rules from the start, which means any tax benefits from the investment are lost.”
Newman also explained that investing in SEIS through a fund is less of a risk for investors because a fund manager is eager to make sure the company complies with the rules for tax reasons.
SEIS rules do not make pre-approval and receiving tax breaks a condition of investment – and even if a company has pre-approval, HMRC can go back to review the qualification points and withdraw the tax breaks.
SEIS tax breaks
Investors in SEIS receive tax breaks offering:
- 50% income tax relief on the amount invested up to £100,000, regardless of the marginal tax rate of the investor. This could mean a maximum £50,000 in income tax relief
- 100% capital gains tax relief on the growth of the value of SEIS shares
- Loss relief should the SEIS start-up fail
SEIS was introduced in April 2013 by Chancellor George Osborne as an alternative financing method for small business start-ups that were failing to receive funding from banks.
The first SEIS companies are about to come out of their three-year incubation period in April 2016.
From then, investors will see how SEIS investments have performed, how many companies have made profits and how many have fallen by the wayside.
