We’ve all been focusing on the Budget lately, which has revealed that these tough economic times for businesses are going to be with us for a while longer.
But while the new National Insurance Employment Allowance or the cutting of corporation tax grabbed the headlines, an announcement tucked away on page 44 of the Budget document could have a big impact on small businesses. The Seed Enterprise Investment Scheme (SEIS), introduced in April 2012, is designed specifically to help small, early-stage companies raise equity finance by offering attractive tax reliefs to the investor. To continue to encourage investors to take up SEIS the government announced in the Budget an extension to one of the tax reliefs that SEIS offers. This little publicised announcement is great news for small businesses looking for finance.
How it works
Small early-stage businesses often need finance if they are to reach their potential. Once the usual funding sources have been exhausted (friends, family, savings) businesses can struggle to raise a few tens of thousand pounds up to around £2m. This phenomenon is known as the “equity gap”. Most venture capital funds prefer to invest larger amounts of investment because of the transaction costs of reviewing suitable investments, such as carrying out due diligence, and the perceived higher risk of small early-stage businesses. But this is where SEIS comes in to help.
Recognising the importance of small and early stage businesses to the economic recovery in the UK, the Government introduced SEIS to help ease this equity gap. SEIS offers attractive tax reliefs for the investor, with the cost of and risk associated with investing in early stage businesses reduced.
Investors can invest up to £100,000 per year through SEIS by purchasing shares in SEIS eligible companies, and receive income tax relief of 50 per cent on the cost of these shares. If you decide to sell your shares in the future you won’t pay a penny of Capital Gains Tax (CGT) on any gains you make. It’s a great package to incentive investing in a small business, but don’t just take our word for it, Angel investor Dale Murray called it “the world’s most generous scheme for angel investors” in an interview with the Telegraph earlier this year.
In the 2013 Budget, to continue to encourage investors to take up SEIS, the government announced a limited extension of the capital gains tax holiday. Any investors making capital gains in 2013-14 will receive a 50 per cent capital gains tax relief when they reinvest those gains using SEIS in either 2013-14 or 2014-15*.
Hopefully, this will mean more small companies get their much needed funding for growth, as the video below explains. There a few criteria which a company must meet to be SEIS eligible: the company must be carrying on, or preparing to carry on a new qualifying trade. ‘New’ means no more than two years old and some trades are excluded. The company must have fewer than 25 employees, with no more than £200,000 in gross assets. A company can receive a maximum of £150,000 under SEIS. Investors aren’t allowed to have more than a 30 per cent stake in the company, or be an employee, and can invest up to £100,000 per year in companies. As might be expected with such generous tax reliefs, there are a number of anti-abuse rules in place for both investor and company.
While the scheme is still relatively unknown by many investors and businesses, with the range of tax reliefs on offer we think this will change in 2013!
*Relief for 2014-15 investment is subject to an election to have shares treated as though acquired in 2013-14.
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