Making your breakthrough with tried and tested tax efficient investment
Whilst being nothing new to the market place, the Enterprise Investment Scheme (EIS) introduced over 20 years ago has been the launch pad for many ideas and developments that have gone on to bring great return and growth for small high risk companies that would have otherwise struggled to raise debt or equity finance.
Statistics released by HMRC in April 2017 state that over £15.9bn has been raised by way of EIS funding and the trends in the value of finance raised and number of Companies involved is clearly responsive to large scale economic development. Technological advancements such as ‘The dot com boom’ and fiscal and monetary policy changes have encouraged activity levels in this type of financing throughout the lifetime of the scheme. Today, with the shifting landscape presented by movements including the emergence of digital currency and the weakening Pound boosting the purchasing power of overseas investors, now could be the time to look to the private investor to make your breakthrough.
Are you a qualifying company?
The rules governing the criteria to be deemed a qualifying company are detailed at great length in (what can be viewed as) daunting tax legislation, but there are a handful of key requirements indicating whether the issuing company is likely to be a qualifying company for Income Tax or Capital Gains Tax (CGT) Deferral Relief. Whilst the rules differ between the two types of taxation, should the company meet the Income Tax EIS requirements, it will also qualify for CGT Deferral Relief.
Key requirements include the following:
- The company must not have gross assets exceeding £15m prior to issue and £16m post issue.
- The company cannot be quoted on any stock exchange.
- In most cases, the shares must be issued within the 7 years prior to the first commercial sale by the Company, if not the funding must be for a qualifying business activity or entering a new product.
- The company must carry out a qualifying trade for the period beginning with issue and continue such a qualifying trade for a period of 3 years from this date. Most companies will carry on a qualifying trade save for such companies that are heavily asset backed (e.g. property development) that would have ease in raising secured debt finance.
- The company must not be a 51% subsidiary of any holding company.
Unsurprisingly, the requirements that apply to investors to determine whether the appropriate tax reliefs can be obtained are also detailed and many in numbers, however they include the following points summarised below:
- The investor must be investing for commercial reasons and must not be doing so with the sole aim of tax avoidance.
- They must hold the shares for a period of 3 years post issue.
- They must be in no way connected to the issuing company whether by employment or equity held (unpaid directors are not included as being connected).
Should you be researching the idea of equity finance, EIS proves to be an attractive proposition for both the issuing company and investor, due to the retained freedom to operate the company and the security of the 3 year investment creating a solid foundation for the company and enabling the investor to claim relief. As an owner managed business, the discretion to operate your business can be fettered to a lesser extent through a collection of private investors, benefitting from EIS, than the more onerous obligations often implemented by incoming PE Houses or VCs.
Bermans have dealt with many companies that have taken the next step in their life cycle through fund raising rounds that have benefitted from both EIS and SEIS reliefs. Bermans’ experience in this area has developed a stream lined approach to such investment rounds making light work of the extensive document coordination and an ability to leave you in the best position to run your company moving forward – including instigating further funding rounds.
Should you want to find out more about the process of getting a funding round off the ground, whether your business is suitable and going about claiming reliefs, contact Jon Davage (firstname.lastname@example.org) who will help you move forward.