Enterprise Investment Scheme

Transcription

1 Enterprise Investment Scheme

2 Enterprise Investment Scheme This brochure provides a brief overview of the main points relating to investment into Enterprise Investment Scheme ( EIS ) companies and the tax reliefs that may be available on such investments. The legislation relating to EIS is extremely complex and this brochure does not purport to provide detailed professional advice. Before making any decision as to whether to invest in any particular company, specific professional advice should be sought beforehand. Please note: The information in this brochure relates only to shares issued on or after 6 April Enterprise Investment Scheme

3 Background An investor may be able to claim Income Tax relief, Capital Gains Tax relief and Capital Gains Tax deferral relief in connection with an investment in unquoted eligible shares of a company that carries on a qualifying trade. Each relief and the situations under which these may be claimed are summarised below. Eligible shares and qualifying trade are subsequently defined. Income Tax relief Income Tax relief is given on amounts invested in eligible shares up to a maximum of 1 million in a tax year. Income Tax relief is calculated as the amount invested multiplied by 30%. This amount may then be deducted from the individual s income tax liability for the year. The amount of relief cannot exceed the actual income tax liability for the tax year. The maximum income tax reduction in any one tax year is therefore 300,000. The whole amount of any EIS investment may be treated as if made in the previous tax year, up to the annual limit in effect for that tax year. 3

4 Income Tax relief is available in the following situations: Subscription for eligible shares in a qualifying company which is made wholly in cash Subscription is made for bona fide commercial reasons (i.e. not as part of a scheme to avoid tax) Shares issued are fully paid up Individual is not connected with the company for EIS purposes (see below). As well as not being connected, the investor must be independent. They must not hold any shares in the company unless: They have previously made a risk finance investment in the company; or The existing shares held were issued to the individual when the company was formed; or The existing shares were acquired when a pre-formed dormant company was bought off the shelf. The share issue does not include any arrangements designed to enable the investor to realise the investment at a later date, secure an investment return or protect the investor against risks, which the investment would otherwise involve The purpose of the fundraising is not a disqualifying purpose. Broadly, the purpose of the fundraising is not simply designed to access the tax benefits under the scheme An investor will be deemed to be connected for EIS purposes if at any time that person together with any associates control the company or hold or are entitled to hold more than 30% of the issued ordinary share capital, voting power or assets of the company on winding up. In addition, an investor is connected with the company for EIS purposes if that person or those associated with that person is an employee or director or is entitled to receive any payment from the company or any of its subsidiaries or is a partner in any partnerships of which the company is a member. However, if an individual becomes a director after subscribing for shares and was not connected with the company beforehand, then as long as all he receives is a commercial rate of remuneration and/or certain allowable expenses, he will be classified as a business angel and will not be connected to the company. 4 Enterprise Investment Scheme

5 Capital Gains Tax exemption and loss relief A gain arising on EIS shares after 3 years from the date of issue of shares may be free from Capital Gains Tax. In the instance that shares are issued to raise money to enable the company to prepare to carry on a trade, then the gain must be made 3 years after the company commences the trade. The maximum investment in eligible shares that may be free from capital gains on disposal is 1 million in any tax year. If an allowable capital loss is made on the EIS shares, then it may be possible to set the loss against income tax liabilities for the current tax year. Alternatively, the capital loss can be set against capital gains arising in the same year or future years in the normal way. The conditions for Capital Gains Tax relief and loss relief are the same as for Income Tax relief as set out above. Capital Gains Tax relief is available provided that none of the Income Tax relief has been withdrawn. 5

6 Deferral relief It is possible to set some or the entire amount invested in qualifying shares against chargeable gains arising in the period commencing three years prior to subscription, and ending one year afterwards. There is no limit to the amount of gain which may be deferred by means of a qualifying investment. The disposal of any shares to which deferral relief is attributable creates a chargeable gain. If all shares are disposed of, then the amount of the revived gain will equal the total amount of the original gain against which investment expenditure was offset. If a part disposal of the EIS shares is made, then the revived gain will be equal to a proportionate amount of the original gain. Deferral relief will continue to be attributable to the remaining shares held. If an investor dies holding qualifying EIS shares into which a gain has been deferred, the gains are not revived and simply fall away. The conditions that must be satisfied to claim this relief are the same as for claiming Income Tax relief with the exception that the investor may be connected with the company for EIS purposes (as defined above). Income Tax relief and Deferral relief are both available on the same share subscription, provided that the conditions set out above are satisfied. 6 Enterprise Investment Scheme

7 Other rules Before subscriptions for shares are invited, a company can submit a proposal to the Small Company Enterprise Centre (SCEC) for obtaining EIS status. The SCEC will review information supplied and will state whether, based on that information, conditions that apply will be met. This is an advance assurance. The company may then inform potential investors that advance assurance has been received, but whether the conditions of the scheme are actually met is a question of fact, which cannot be determined in advance. Interest payments on loans to acquire shares in a close company may qualify for tax relief. However, in the event that loans are taken out to acquire shares with EIS status, then tax relief on interest payments cannot be claimed if EIS Income Tax relief is claimed. If an investor, or their associate, borrows any money where the loan: a) would not have been made; or b) would not have been made on the same terms if the investor had not subscribed for the relevant shares then no EIS relief can be obtained. Thus any loan which would have been made to the investor, whether or not the EIS shares were subscribed for, would not affect the ability to claim EIS relief even if the money was subsequently used to acquire EIS shares. For the purpose of EIS status, shares listed on AIM and the ISDX growth market are deemed to be unquoted and may therefore qualify for the EIS reliefs listed above. Detailed anti-avoidance rules also apply to EIS relief, the main being that: i) there cannot be any guaranteed exit arrangements in place when the shares are subscribed for (or in the three year period following subscription or commencement of trade whichever is the later); and ii) the investor must not receive, to any substantial degree, any receipt of value from the company (or its associates) during the period of one year prior to subscription to three years following subscription or commencement of trade, whichever is the later. What is a receipt of value is set out later in this brochure. 7

8 Eligible shares The conditions applying to the issue of eligible shares are: Shares must be unquoted (AIM and ISDX growth market are permitted). Shares must be issued for bona fide commercial reasons. Monies must be used in connection with a qualifying business activity. It cannot be used to buy an existing company or business. Monies must be employed within 24 months of share issue (or within 24 months of commencement of a qualifying trade). This is the relevant period. Where monies raised are used by an existing subsidiary, the subsidiary must be a 90% subsidiary throughout the relevant period and must undertake a qualifying business activity. The company can be a parent company provided that no subsidiary undertakes substantial non-qualifying business activities (defined as being 20% of activities). The company seeking to obtain EIS status should have gross assets not exceeding 15 million immediately before the share issue and 16 million immediately after the share issue. The company issuing the shares (or group of companies, if it is a parent company) must have fewer than 250 full-time (or their equivalent) employees at the date the relevant shares are issued. (500 full time for knowledge intensive companies). The company (or group of companies) must have raised no more than 12m in venture capital funding ( 20m for knowledge intensive companies). The company must have been trading for less than 7 years before the issue of shares unless there has been a previous issue of EIS/SEIS or VCT shares or there has been a fundamental change in the nature of the business. (10 years for knowledge intensive companies). There is an exception to the 7 year rule for a company over 7 years old and which previously has not raised risk finance. If it raises in a 30 day period a total under EIS/SEIS/VCT of over 50% of the company s average annual turnover over the previous 5 years, it can qualify. The shares must be issued on or before 5 April Enterprise Investment Scheme

9 Qualifying business activity The issuing company must have a Permanent Establishment in the UK. That means it has a fixed place of business in the UK through which the business of the company is wholly or partly carried on. This excludes overseas companies which have no direct UK activities from being a qualifying EIS company but does allow a UK parent company to raise money for the trade carried on by a wholly overseas subsidiary. A qualifying activity must be conducted with a view to generating a profit. Non-Qualifying Business Activities Dealing in land, shares and other financial instruments Financial activities such as insurance, money-lending, banking etc Asset leasing and hire Receiving royalties or licence fees (with certain exceptions) Providing legal or accountancy services Property development Farming or market gardening Operating or managing hotels or nursery homes where it does so under a licence or similar agreement Shipbuilding, coal production and steel production Receiving FiTs or similar subsidies, subject to specific exemptions All energy generation activities A company will not be able to attain EIS status if non-qualifying business activities constitute a substantial proportion of its activities. The general rule is that any activity that constitutes greater than 20% of total activities is substantial. 9

10 Receipt of Value The following items are the main circumstances in which an investor would be treated as receiving value from the company. The company buys any of its shares or securities which belong to the investor (or his associates) Makes a payment to the investor (or his associates) for giving up the right to payment of a debt Repays a debt to the investor (or his associates) that was incurred before the shares were subscribed for, except where the repayment is not made in connection with any arrangements concerning the share acquisition. Where someone subscribes for shares in a company, then makes a loan to the company, he may be able to receive repayments of that loan without affecting EIS relief on the original or any further subscriptions, provided that he does not use repayments to fund the further subscriptions, or they are not otherwise treated as linked to the subscriptions Lends money which has not been repaid before the shares are issued Provides the investor (or his associates) with certain benefits Acquires an asset from investor (or his associates) at more than market value or sells at less than market value Makes any other payment to the investor (or his associates) which is not a qualifying payment References in the above to company include references to associates of the company. Receipts of insignificant amounts are ignored. 10 Enterprise Investment Scheme

11 Method of Claiming Relief A company can submit a claim form EIS1 to HM Revenue & Customs requesting the issue of the relevant EIS certificates either immediately after subscription or, if the company had not been trading for four months at that time, once the company has been trading for four months. This must be submitted within two years of the end of the tax year in which the subscription took place or, if the four month trading period straddles the end of a tax year, two years from the end of that four month period. If HM Revenue & Customs are satisfied, based on the information received, that the claim is valid, they will issue the company with a form EIS2 which authorises the company to complete and issue the relevant EIS3 certificates to the relevant investors. The investors then complete their section of the form EIS3 and submit it to their Inspector of Taxes or include the relevant relief on their Tax Return. Investors cannot claim the relief until they have received the form EIS3. Clawback and Notification Matters Where any of the conditions are breached, either the company or the investor (dependant upon the type of breach) must inform HM Revenue & Customs within 60 days. Dependant upon the relief claimed, a breach may result in the full or partial clawback of the relief originally claimed and, again dependent upon the circumstances, the clawback may be treated as occurring from the initial date of subscription or the date the breach occurred. 11

12 HW Fisher & Company Business advisers - A medium-sized firm of chartered accountants based in London and Watford. Related companies and specialist divisions: Fisher Corporate Plc Corporate finance and business strategy FisherE@se Limited Online accounting and back-office services Fisher Forensic Litigation support, forensic accounting, licensing and royalty auditing FIAC (Fisher IT Asset Consulting) Software and hardware asset management, contract and supplier review, licence and audit defence Fisher Partners Business recovery, reconstruction and insolvency services HW Fisher & Company Limited Advisers to small businesses and start-ups Stackhouse Fisher Limited Specialist insurance services Eos Wealth Management Ltd Intelligent wealth management and financial services VAT Assist Limited UK VAT representative London office Acre House William Road London NW1 3ER United Kingdom T +44 (0) E advice@hwfisher.co.uk Watford office Acre House 3-5 Hyde Road Watford WD17 4WP United Kingdom T +44 (0) F +44 (0) HW Fisher & Company and HW Fisher & Company Limited are registered to carry out audit work in the UK and in Ireland. A list of the names of the partners of HW Fisher & Company is open to inspection at our offices. HW Fisher & Company is licensed by the Institute of Chartered Accountants in England & Wales to carry out the reserved legal activity of non-contentious probate in England and Wales. Fisher Forensic, Fisher Okkersen, Fisher Partners, Fisher Performance Improvement, Fisher IT Asset Consulting, FIAC and Kingfisher Collections are trading names of specialist divisions of HW Fisher & Company, Chartered Accountants. HW Fisher & Company Limited, Fisher Corporate Plc, FisherE@se Limited, Fisher Forensic Limited, VAT Assist Limited, Eos Wealth Management Limited and Stackhouse Fisher Limited are related companies of HW Fisher & Company, Chartered Accountants. HW Fisher & Company and HW Fisher & Company Limited are not authorised under the Financial Services and Markets Act 2000 but are regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. They can provide these investment services only if they are an incidental part of the professional services they have been engaged to provide. Fisher Corporate Plc is authorised and regulated by the Financial Conduct Authority under reference Eos Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority under reference Stackhouse Fisher Limited is an Appointed Representative of Stackhouse Poland Limited who are authorised and regulated by the Financial Conduct Authority under reference HW Fisher & Company is a member of the Leading Edge Alliance, an alliance of major independently owned accounting and consulting firms that share an entrepreneurial spirit and a drive to be the premier providers of professional services in their chosen markets. If you would like to subscribe / unsubscribe to our publications, please info@hwfisher.co.uk This briefing is printed on Essential Velvet recycled paper. HW Fisher & Company Print date: April All rights reserved.