Funding for EIS and SEIS tax reliefs hits £2.1bn

The number of companies applying to use tax reliefs such as the enterprise investment scheme to attract investors has risen slightly in the last 12 months with over £2.1bn in funding approved as investors look to maximise returns

In 2017-18, 3,920 companies raised a total of £1,929m of funds under the enterprise investment scheme (EIS) scheme. This was an increase of £28m from 2016-17, when 3,655 companies raised £1,901m, according to the latest HMRC figures, although these are preliminary figures and may be adjusted upwards.

However, there was a fall the in use of seed enterprise investment schemes (SEIS) with the number of companies qualifying for funding down slightly year on year at 2,320 [2016-17: 2,425] although financially grants remained fairly static at £189m over the period.

In total £2.118bn of tax reliefs was paid, up £30m on the previous period, with EIS investment qualifying for 30% income tax relief for the investor based on the amount subscribed for, as well as deferred capital gains treatment.

The majority of applications were submitted by companies registered in London and the southeast, with IT and communications accounting for over a third of all EIS and SEIS investment.

There have been criticisms around the complexity of the application process, particularly for the smallest start-ups and there has been a sharp drop in advance assurance requests over the period, down 28% from 2,860 to 2,040 year on year. Although this is not mandatory, most companies do submit advance requests to HMRC to get initial approval that the tax authority will treat the shares to be issued as satisfying the requirements of the various schemes.  

The advance assurance process is not mandatory for companies but can offer protection if HMRC deems that the initial bid falls outside the legislative construct.

Changes to the rules from January 2018 onwards has also affected applications, as HMRC will only provide an opinion where the application names the individual(s), fund manager(s) or other promoter(s) who are expected to make the investment. This was to reduce the number of speculative applications received.

At the time HMRC stated: ‘Though we do not expect the company making the application to have formalised offers of investment, we do expect the company to have approached potential investors before making the advance assurance application to determine the likelihood that they will attract actual investment.’

Zena Hanks, partner at Saffery Champness, said: ‘These stats show that EIS continues to be a popular method of attracting investors to back higher risk trading companies to raise finance. In the case of EIS investment, the attraction comes in the form of 30% income tax relief for the investor based on the amount subscribed for.

‘In addition, where an investor has made a capital gain, it is possible for that gain to be deferred where it is matched to the amount that is invested via EIS. 

Even better, provided income tax relief has been claimed on the investment, if the EIS shares are later sold at a gain, this gain will be exempt from CGT.

‘The tax breaks for the investor into SEIS do not mirror EIS tax reliefs, but they are similar in that they make it appealing for investors who are interested in investing into new and start-up businesses to take a stake in the company and obtain a tax break for doing so.

‘We know that tax relief on contributions into pension schemes for high earners has been capped and the continued take up in EIS and SEIS investments demonstrate that individuals are looking elsewhere for tax relief.’

HMRC report, Enterprise Investment Scheme Seed Enterprise Investment Scheme and Social Investment Tax Relief, issued May 2019

By Sara White

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Comments

If we abolished capital gains tax altogether we wouldn't need this complex tax regime or these reliefs.

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