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Jan

SEIS - our wish of changes PUBLISHED IN tax

When first announced the Seed Enterprise Investment Scheme (“SEIS”) seemed a welcome development for start ups. However on review of its draft legislation one feels that the SEIS (if enacted as originally drafted) is a missed opportunity and falls short of what is really needed to help start ups flourish to support the Government’s growth agenda for UK Plc.

The immediate disappointment is a key person has not been considered – the Founder. The difficulty with equity finance (and therefore accepting it) is it means surrendering a significant part of the business. By SEIS (and EIS) only concentrating on equity investment there is no additional encouragement or benefit for Founders to “step forward” to introduce their business ideas. It is a shame the Government has not considered this side of the “equation” by introducing relief for other forms of financing, (i.e. loans). What is key is the marrying of ideas with private investors’ cash. It is frustrating that the suite of reliefs for small private company investment continues to focus on equity as the only source of finance worth rewarding. This “thinking” needs expanding. SEIS was (and still is) a good opportunity to introduce some form of tax relief for medium/long term loan investment. This would encourage Founders, knowing they can still attract cash while at the same time not having to surrender ownership of their idea.

Looking at the detail, some specific areas of the draft legislation that we would change include;

Increase the financial limits tests. Gross assets and number of employees must be no more than £200,000 and 25 at the time of share issue. Also the amount cumulatively raised under SEIS can be no more than £150,000. These limits are disappointingly low and any increase would be warmly welcomed.

Extend the timing of incorporation rule. Here shares must be issued within 2 years of the issuing company’s incorporation. We consider this is too short (there are many reasons why a company is dormant for a period before any real activities commence). It should be amended to be either 2 years from commencement of activities or say 5 years from date of incorporation.

Remove the no subsidiaries rule. The issuing company must not control another company from incorporation to the 3rd anniversary of the share issue. Why? This is far too restrictive. As long as the “group” satisfy the financial limits (gross assets and number of employees) at the time of issue this should be sufficient to ensure the investee is a start up. Such a rule creates a barrier to growth as well as interfering as to how a corporate should structure its affairs. This requirement should be removed or at very least replaced with the qualifying subsidiary test found in the EIS legislation which permits “51% subsidiaries” of the issuing company.

Amend the withdrawal of SEIS relief rules. Full withdrawal of SEIS relief occurs in various circumstances including where the company subsequently fails to continue to be a qualifying company. Here there is no interaction with EIS. This means SEIS relief (both the income tax credit and capital gains exemption) is still withdrawn in full where a company subsequently fails to be an SEIS company but continues to qualify for EIS (perhaps because it acquired a subsidiary!). This is overly punitive. A fair position in such circumstances would be to “downgrade” to EIS, i.e. only of 2/5ths of the income tax credit is clawed back with the CGT exemption remaining intact. If the draft legislation is not revised to reflect this it might mean the company making a ”protective” EIS claim for its SEIS investors!

Outside the SEIS/EIS legislation, another change we would like to see is to the “purchase of own company shares” rules. Generally to obtain capital gains treatment (tax free exit for EIS/SEIS investors) the shares must be held for 5 years otherwise the buy-back receipt is classified as a dividend (no tax exemption). Reducing the holding requirement from 5 to 3 years for EIS/SEIS investors not only aligns these rules with the capital gains exemption for EIS/SEIS but accelerates a tax efficient exit for investors (who might then reinvest in other SMEs) as well as providing Founders the opportunity to re-acquire control.

Well the above is our INITIAL wish list. Will we get it? We doubt it, Father Christmas has long gone!

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