Entrepreneurs trying to save start-up cash by buying an off-the-shelf company risk losing out on valuable Seed Enterprise Investment Scheme (SEIS) tax reliefs.
The government decision to deny the tax boost seems to undermine one of Chancellor George Osborne’s key Budget 2012 moves to trigger investment in small businesses with no way to borrow from more traditional sources, like banks.
The Chartered Institute of Taxation (CIOT) has warned SEIS tax reliefs are not available if the start up company has been controlled by another company.
This means that purchasing an ‘off the shelf’ company from corporate formation agents to use as the start up company will jeopardise the availability of the relief at the outset, explains CIOT.
SEIS tax relief
This is because the off the shelf company will have been under the control of a corporate shareholder at some point after incorporation, even if the shares are transferred to a non-corporate subscriber before the SEIS share issue.
The ban is possibly an oversight in the legislation as the measure is aimed at preventing companies established for more than two years from restructuring to take advantage of the investment reliefs for SEIS companies.
The SEIS was introduced in Finance Act 2012 to encourage investment in new start-up companies by offering a series of tax reliefs.
SEIS provides generous tax reliefs to investors, including:
- Income tax relief worth 50% of the amount invested to qualifying individual investors
- An exemption from CGT on gains on shares within the scope of the SEIS
- An exemption from CGT on gains realised from disposals of assets in 2012-13, where the gains are reinvested through the new SEIS in the same year
Venture capital reliefs
John Barnett, Chairman of the CIOT’s Capital Gains Tax and Investment Income Sub-Committee, said: “Denying SEIS relief for shelf companies seems bizarre and illogical. Enterprise Investment Scheme (EIS) companies are not subject to the same requirement, so why deny relief to SEIS companies?
“SEIS companies will, by definition, be smaller start-ups which are likely in this way to use a shelf company.Of course those that are able to take advice will avoid this pothole by setting up the company from scratch rather than buying a shelf company, but I fear that many may be caught unawares.
“This is, unfortunately, one of many nit-picking points which bedevil venture capital reliefs. The government has introduced these reliefs to help entrepreneurial companies, but HMRC then seems to hedge the relief about with so many conditions of which this is just one.”
