When you wish to use a venture capital scheme to allow equity investors to claim tax relief, you need to understand the conditions for the company to qualify before the investments are made. The best way to do this is to read the law, or contact our office for advice. It’s a pity that HMRC didn’t do this before declining an application to use the SEIS by a small company in Oxford.
The Seed Enterprise Investment Scheme (SEIS) is specifically designed for young companies to raise relative small amounts of start-up capital. The company is permitted to raise up to £150,000 over a three year period, and the maximum investment per taxpayer is £100,000 per tax year. There is no minimum investment for either the company or for the equity investor.
Oxbotica Ltd, a spin-out company from Oxford University, applied to use SEIS for part of its initial equity capital. It was formed with £1000 of share capital and three individuals wanted SEIS relief on their share of this which amounted to just £316. In addition the company received a substantial loan from the University.
As with any risky venture, the investors were looking to the long term gain on the shares, so they were not very interested in 50% income tax relief on the investment, but they were attracted by 100% exemption from CGT once the shares had been held for three years.
HMRC declined the company’s application to use SEIS on these grounds:
- The shares were subscriber shares – this is irrelevant as long as the shares are subscribed for in cash and are fully paid up.
- The small amount of funding wasn’t of meaningful use to the business – this is an invented condition as there is no minimum investment requirement.
- The real purpose of the share issue was to provide CGT relief to investors – irrelevant if the money is used for the business’ expenses – which it was.
The tax tribunal had no problem in agreeing with the taxpayer that SEIS was applicable, but it’s disappointing that the statutory review process didn’t reverse the initial HMRC decision, which it was so clearly outside the law.
Written by the Tax Advice Network