Partner Article

Planting a seed that grows for life (EIS)

Chartered accountancy practice Tait Walker have launched a business advice blog for business owners and managers in the North East, available at www.businessadvicene.com. As a taste of forthcoming articles that will be featured via the blog, Tait Walker’s Chris Hodgson discusses the Seed Enterprise Investment Scheme (SEIS):

The UK economy went through a large shock in 2008 and 2009. Now, just as we appeared to be pulling out of those problems, wider issues bring the potential for a double dip recession.

We are told that manufacturing and innovative industries will be the engine for growth to pull us out of these difficult times. A problem is that these businesses require initial capital and the current economic climate means that such ventures are risky.

Banks are “open for business”, but lending to start up SMEs is extremely difficult to source. Venture capital or business angels are an option if you are willing to give up a proportion of your business, but the risks associated with this are huge. Using some Dragons’ Den speak, the risk associated with such a new venture could make potential funders announce “I’m out!” before the business even gets off the ground.

Seed Enterprise Investment Scheme (SEIS) is intended to help provide an alternative source of funding for banks, while tax incentives reduce the downside risk for a business angel.

SEIS gives an investor an Income Tax saving of up to 50% of the amount invested. In addition, if a person makes a capital gain of up to £100,000 in 2012/13 and invests those funds into SEIS qualifying shares, the capital gain made by the taxpayer is totally tax free.

Given that the gain may well be taxed at a rate of 28%, an investment may qualify for 78% tax relief overall, i.e. an investment of £100,000 has a cost, net of tax relief, of only £22,000.

The scheme is focused on small start up companies so that, for example:

- The limit for an investor is £100,000 per tax year.

- The maximum SEIS investment into a company is £150,000.

- It must be no more than two years since the company was incorporated.

- The investor must hold less than 30% of the ordinary shares of the company.

- The investor must not be an employee of the company.

- Certain trades are excluded from this relief.

- There must be no pre-arranged exits.

- A sale of the SEIS shares within three years gives rise to a claw-back of relief.

Some investors will want to invest in one company and also provide their expertise to help it to grow. For other people, this is putting all of your eggs in one basket and they have no time to, or interest in, mentoring the business owner. In that case, it is likely that SEIS funds will be developed allowing investors to place their money across a range of companies so that investment risk is managed.

Another factor which can make this even more interesting is that a number of these new companies may also qualify for research and development tax credits. This additional tax saving in the company could further reduce the investment risk for potential business angels.

This is a very generous relief and some clients are already expressing an interest in the benefits it can bring to them. We will closely follow how this relief develops and how the investment industry reacts to it. From small seeds big things can grow!

Author: Chris Hodgson, Tait Walker

Visit www.businessadvicene.com to find out more.

This was posted in Bdaily's Members' News section by Kirsty Ramsey .