EIS

Taxation of Innovation – How UK tax incentives support the innovation lifecycle

Here are the slides that I used to present to the Chartered Institute of Patent Attorneys (CIPA) at a seminar in Liverpool last week. The key relevant theme was the Patent Box (given the audience) but my objective was to emphasise how and where the Patent Box fits into the wider series of Government tax incentives aimed at innovative IP-rich UK companies.

From start-up we have the Seed EIS followed by EIS for tax efficient funding. Both schemes are designed to support companies undertaking R&D work and creating their own IP.

R&D tax credits then step into support companies during the development phase. The R&D tax credit relief continues to be a fantastic source of support for UK companies but up until 1 April 2013 there was a cliff-edge at the exploitation stage as there were no tax incentives there to support IP rich companies.

This where the Patent Box steps in to support companies with qualifying patents to complete the innovation business lifecycle.

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Can I raise funding under both the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS)?

The quick answer is YES – you can raise funding under both SEIS and EIS but there are some important points to watch including:

  1. If you wish to raise cash under both schemes, you must issue shares under SEIS before EIS. You can’t raise money and issue shares under EIS and then seek to raise money and issue under shares under SEIS after. It kinda makes sense but one to watch…
  2. You can only follow on with an issue of shares to investors under EIS once you’ve spent at least 70% of the SEIS cash (no sniggering at the back!). This can raise some practical difficulties as the SEIS investment limit for the company is capped at £150,000 so you don’t want to be back out on the investment trail too soon. It is possible to raise the SEIS and EIS money jointly but to take great care in the issue, timing and other matters related to the shares and investors. *******
  3. There are some other ‘funnies’ around timing of appointment to Director etc which can differ between the schemes among other things so you need to take care as you don’t want to jeopardise the EIS relief further down the line.

Drop me a line if you need any help either via the contact page or on Twitter (@stevelivingston) or via my specialist tax advisory firm, ip tax solutions.

******* Note that this 70% rule has been abolished for share issues post 5 April 2015

 

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How to apply for advance assurance for SEIS / EIS

HOT OFF THE PRESS: We’ve just launched a brand new online course that shows you exactly how to complete and file your SEIS / EIS advance assurance application with HMRC. We walk you through every stage of filling out the form plus share some additional resources to help ensure a smoother passage through HMRC. Access it by clicking here. [Use the code: SEISAA2017 to get 50% off in January]

A short overview of how to apply for advance assurance from HM Revenue & Customs that your company is a qualifying company for the purposes of raising funding under the Seed Enterprise (SEIS) or Enterprise Investment Scheme (EIS). [Update – the form looks different now and is an online form – check out our course for the latest version (Jan 2017)]

You can find the SEIS / EIS advance assurance application form here.

The process normally takes 30 days for HM Revenue & Customs to issue advance assurance or revert back with any questions.

You can seek specialist professional SEIS / EIS assistance here.

Crowdfunding: A useful tool for navigating sources

Screen Shot 2013-05-21 at 22.17.22With a new crowdfunding platform emerging seemingly every week, it has become increasingly difficult to keep track of them – let alone their particular business model, approach and fee structure.

NESTA has released a timely online platform that provides a useful summary of the key features of the various crowdfunding platforms available right now.

There are some useful filtering tools plus some high level tips and additional information for founders seeking funding and potential investors. It may have been helpful for the site to list a little more info on SEIS / EIS funding opportunities given the extra kick starter this can provide for UK businesses.

Overall, I hope this site is maintained as it should prove to be a useful resource.

Click here to access the platform.
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£1m benefit of being a tax aware entrepreneur

EuphoriaMark knew that his new business would be at the cutting-edge of technology and potentially even a world-player – exactly the sort of business that the UK Government is keen to promote and support in the form of tax incentives.

Fully aware of the opportunities that the UK tax code provided for releasing cash into his new venture, Mark kicked off by raising an initial £150,000 under the Seed Enterprise Investment Scheme (SEIS). A 50% income tax break for the investors made it easier to nudge up the cash they were willing to part with; plus the opportunity to sell their shares after three years – capital gains tax ‘free’ – made the investment even sweeter. Mark had pondered utilising this tax break on his own £10,000 investment into the company but decided that, on this occasion he wanted to retain more than 30% of the share capital (which precluded him from SEIS) – maybe next time…

This SEIS cash would be used to fund the R&D phase in employing a small team of developers. Given that the company was pre-revenue, Mark was able to claim a welcome tax refund from HM Revenue & Customs under the SME R&D tax credit scheme. This released in excess of £30,000 into the business which was promptly used to fund a further developer outside the SEIS funds to accelerate the project.

Having made significant inroads on the R&D work (whilst burning through in excess of 70% of the SEIS cash!), Mark approached investors for a further round of funding – this time under the Enterprise Investment Scheme (SEIS’s ‘big brother’!). A 30% income tax break this time for investors (plus potential for a capital gains free exit) provided sufficient enticement for investors to inject a further £2m into the company.

Meanwhile, whilst the R&D work was ongoing, Mark had made investigations regarding the potential for filing one or more patents on aspects of the underlying invention generated by the R&D work. With the arrival of the new Patent Box tax incentive from 1 April 2013, Mark knew that a 10% corporation tax rate by 2017 on worldwide income derived from qualifying patents could add additional value to his company as it approached an exit as well as releasing further much needed cash into the business from now until then.

Eyeing an exit in 3-5 years time, Mark ensured he retained at least 5% of the share capital post dilution at each funding round in order to secure a capital gains tax rate of just 10% on his first £10m of gains. His SEIS and EIS investors should be extra happy with a 0% capital gains tax rate after three years!

All in all, Mark had pulled the relevant statutory tax incentive levers to maximise the release of cash into his business at each stage of its life-cycle. What was this worth? It depends – the SEIS, R&D and EIS savings total approximately £700,000 but assuming a profitable few years under the the Patent Box and taking into account the above savings it is not difficult to reach overall pre-exit cash tax savings of £1m+.

Getting advice from the start can get you on the road to being a tax aware entrepreneur…

image credit:Creative Commons License Hartwig HKD via Compfight

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EIS or SEIS – You decide!

HM Revenue & Customs kindly provides companies with a form that can be used to apply for advance assurance that a company is a qualifying investment for Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) purposes.

Obtaining such assurance in advance of a share issue under either scheme is highly valuable to prospective investors – in fact, most sophisticated investors will insist upon sight of such an assurance before parting with their cash.

But there is a problem with the form – its dual status means that if you simply fill it out without specifying which of the schemes you are applying under then you are leaving it to HMRC to guess which you are after – which isn’t the best plan in a formal tax clearance!

Admittedly there are a couple of tick boxes that relate specifically to SEIS but you would be well advised to draft a separate letter spelling out your requirements or seeking professional assistance – after all the difference between 50% income tax relief and 30% could free up extra investment for your fledgling company.

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EIS / SEIS: Navigating traps for the unwary (webinar)

  • Are you an entrepreneur or company founder seeking funding? 
  • Have you considered the benefits of the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) to attract private investment from individuals and business angels? 
  • Or are you a prospective EIS / SEIS investor?

If you answered YES to any of the above, this FREE webinar may be for you. 

In this 45min webinar, Steve Livingston, Chartered Accountant and experienced tax advisor to fast growth companies walks participants through:

  1. An overview of the EIS / SEIS schemes
  2. Does my company qualify – common areas for concern?
  3. How to get advance assurance from HMRC and why its important?
  4. Common investor stumbling blocks
  5. Practical issues in structuring the investment to ensure it qualifies
  6. I’ve received the funding – now what?
  7. DIY – How wrong could this get,,,,,?

This seminar aims to provide entrepreneurs and company founders with an overview of the common stumbling blocks encountered in raising EIS / SEIS fundings so that they can maximise funding opportunities and help ensure that their investors’ tax position remains protected.

You will ideally already have an understanding of the basics of EIS / SEIS, although not essential.

To find out more about ip tax solutions visit our site: www.iptaxsolutions.co.uk

If you enjoyed this post, get email updates (it’s free).


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Seed EIS (SEIS) match-making conundrum

Six months in, we are starting to see increasing activity in relation to the fantastically generous Seed EIS (SEIS) funding tax-break for early stage companies.

Investors can, in effect, be ‘subbed’ £78,000 by the Government for a £100,000 investment into a qualifying SEIS company – which is fairly staggering when you take into account the added benefit that, should the investee company become a roaring success, the investor can sell their shares ‘tax-free’ after three years!

Given these hugely valuable tax breaks, why aren’t we seeing more Seed EIS activity?

I am coming across a few reasons:

  • Lack of awareness – in fairness, this tax break has only been available since 6 April 2012
  • Confusion between SEIS and EIS – I have had a few instances where companies have already received funding under EIS so cannot then follow on with SEIS
  • Biggest reason – difficulty matching investors / business angels with qualifying promising investee companies.

I am unsure whether this experience is mirrored across the country but this is certainly something that I am seeing in the north west. Meanwhile, more savvy entrepreneurs are utilising this tax break to help subsidise offshoot ventures.

We need to provide more support for early stage companies (Note: early stage / seed for SEIS means a company that has been trading for less than two years) and – although I am aware there are regulatory issues – I would be interested in exchanging ideas for how we can improve the process of matching Business Angels with potential SEIS qualifying companies across the north west and UK more widely.

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EIS Funding Catch

A key requirement of EIS (Enterprise Investment Scheme) relief is that the funds invested are ’employed’ within the investee business within the requisite time. The current requirement is that 100% of the funds must be invested within 2 years in the qualifying trade.

But how can a company ensure that it can demonstrate that it has fulfilled this requirement?

It is commonly advised that companies maintain a separate bank account for the EIS funds received. This way the company can maintain a record of both the timing and nature of the expenditure to which the EIS funds have been employed. There has never been a problem with EIS funds being used for working capital requirements – in fact, advisers have often recommended that funds be utilised for working capital requirements in priority to other funds if there was a risk that the funds might not otherwise be invested in time – however, a recent court case has added a layer of complexity to this commonly accepted advice.

The recent Skye Inns case was decided against the taxpayer on the grounds that a proportion of the funds was not invested within the required time limit. This was despite the fact that a separate bank account was maintained. The company was faced with a difficult decision in that a particular investment fell through shortly before the time limit for investment of the EIS funds was set to expire. The company therefore tried to argue that the funds had (largely) been utilised in servicing working capital demands instead. The appeal court decided, however, that the ongoing trading income of the investee business should be considered for servicing working capital in priority to any EIS funds. On this basis, HM Revenue & Customs won the appeal and the EIS relief was denied for the taxpayer.

It is key therefore that EIS subscription monies are earmarked in the relevant period for a specific current or future trading requirement rather than simply dipping into the EIS account, as necessary, and relying on a first in / first out (FIFO) basis to favour EIS funds over subsequent trading income. As ever, the paper trail will be key in ensuring that relief is not denied.

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