I know it’s not cool to aim for being ‘ordinary’ and its not a label that you’ll want attached to your business but when it comes to your SEIS / EIS shares this is exactly the label you want – ordinary shares.
SEIS / EIS shares must be ordinary non-redeemable shares and carry no preferential rights to dividends or assets on a winding-up.
If you have institutional or other non SEIS / EIS investors then things can become more complex, if they say want preferential rights in relation to certain aspects of the business.
In this scenario, differing share classes would typically come into play with say ‘A’ shares for the founders, ‘B’ shares for VCs (both classes may have some preferential rights to varying degrees) and ‘C’ shares for SEIS / EIS investors – these being the ‘highest risk’ ordinary shares.
No one-size fits all but this gives you an idea. If you are going to go down the road of different share classes then bear in mind that this will require formal legal procedures to give effect plus amendments to the Articles of Association of the company (this goes beyond the scope of this course – get yourself a decent lawyer!).
This is a just one of a series of emails from our SEIS / EIS course – you can subscribe to the course below:
Here’s a round up of some recent financial & tax news that might be of interest – you can find an audio download version of this post below:
Calls for quarterly R&D tax relief for SMEs
In an effort to boost SME cashflow, there are calls for the Government to make the UK R&D tax incentive a quarterly rather than end of year tax relief. Currently SME companies claim R&D tax relief retrospectively. Large companies can, however, reduce (in year) quarterly instalment tax payments that they are required to make thereby securing the benefit of the relief earlier. This measure would help level the playing field. This makes sense – we’ll have to wait and see…
March Budget 2016 – Pension countdown
George ‘O’ will step up on 16 March 2016 to deliver his Budget Statement and the big news is expected to be regarding restrictions on income tax relief on pensions for higher rate tax-payers.
Action point: Consider making pension contributions in advance of the Budget date.
Patent Box changes afoot – act now
New, more stringent rules will apply to companies that elect into the Patent Box tax incentive after 30 June 2016. This follows the ‘beating’ this UK Gov tax incentive received from other EU states following its introduction in 2013 (but for how much longer in the light of a possible Brexit….?).
Action point: If you have a patent or patent pending, consider electing in before 30 June 2016.
Get ready for new dividend tax rates
From 6 April 2016, new dividend tax rates will apply that results in an almost complete shake-up of the fairly established remuneration structures for most owner-managed companies.
Action points: Run some calculations to see how you might be affected and consider paying further dividends in advance of the 5 April 2016 deadline. Note that companies that qualify for R&D tax relief might have some of the down-side offset by receiving a greater proportion of the remuneration in the form of PAYE salary / bonus and claiming enhanced R&D tax relief (dividends are not eligible).
Buy-to-let changes – traps for the unwary
I probably don’t need to tell you more about the widely publicised restrictions being placed on buy-to-let interest relief etc but watch out for the Stamp Duty Land Tax (SDLT) 3% surcharge that can bite in what might otherwise be fairly innocuous circumstances…
For example, buy a new residential house before selling old residential house = 3% ouch! You might be able to receive a refund in these circumstances but the initial additional SDLT outlay can be significant and is yet another case of a tax sledge-hammer to crack a nut!
SEIS / EIS Course Launch
By popular demand, we have set up a new course setting out in the ins-and-outs of the hugely popular (yet often misunderstood!) Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).
These UK Government tax incentives are growing in popularity – especially with the growth of crowd-funding platforms such as Crowdcube. We have helped and continue to help 100’s of companies navigate and make the most of these tax reliefs which can be quite tricky to navigate for the uninitiated.
If you are a company founder or considering diversifying into business angel investing yourself, you should benefit from this course.
You can sign up to receive the course via email here:
In this episode of the Get Funded! podcast we cover the types of trades that qualify for funding under the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).
We discuss the HMRC excluded activities list that you need to check to confirm that your proposed trade is not listed i.e. excluded. If not, then you should be okay.
There is a relaxation for these excluded activities to be included within your trade although it must not amount to a ‘substantial’ proportion of your overall trade. ‘Substantial’ for these purposes is deemed to amount to no more than 20%. The HMRC advance assurance procedure would be key in these circumstances.
We pay particular attention to the potential problem for software companies (particularly software-as-a-service (Saas) based companies) given that the receipt of royalties or licence fee income IS an excluded activity. There is a carve-out from this exclusion for companies that create the whole or greater part of the underlying asset that generates the licence or royalty fee income – most software companies rely on this exemption to qualify for SEIS / EIS – but there are some further traps for the unwary….
“Get ready to slice the pie!”
This show is all about the need to issue shares in return for a cash investment if it is to be eligible for SEIS or EIS under current rules.
We also cover what doesn’t qualify e.g. loans, and some tips around types of shares and nominal values of shares to help you get the SEIS share capital structure right from the outset.
Please subscribe and leave us a rating on iTunes – this will help this podcast get found by more entrepreneurs and help the UK get ahead in raising funding for exciting new startups!
- 50% income tax relief
- potential for 14% capital gains tax shelter
- IHT exemption after 2 years
- CGT free sale after 3 years
- Sideways income tax relief should the startup fail
All in all this can amount to up to 86.5% tax shelter for the investor so only 13.5% capital may be at risk.
- why and how SEIS is becoming so popular?
- why many business angels and seasoned investors will expect you to have considered SEIS?
- an outline of the tax benefits that SEIS provides for investors
- why you might be at a disadvantage pitching for investment without SEIS?
Leave us any comments or questions in the comments section.
Having prepared and filed too many to mention (!), here are a 5 tips on applying for SEIS / EIS HMRC advance assurance:
1. Don’t leave it too late! HM Revenue & Customs (HMRC) are generally pretty good in turning around applications within 30 days but it can peak to 6 weeks around key tax deadlines e.g. 31 Jan self assessment tax return filing date and 5 April end of personal tax year.
2. Use the form that HMRC provide for you but you may wish to accompany the form with a covering letter, as there’s not much room to disclose any additional matters that might be relevant. Don’t forget, this is a tax clearance document and therefore, HMRC will reserve the right to withdraw an approval if it later transpires that you didn’t disclose all of the facts. You have been warned!
3. The advance assurance application process is not mandatory but is well advised for two principal reasons: i) most investors will insist on evidence of HMRC approval for their own peace of mind before parting with their investment cheque [update: it is now a requirement that you include the names and addresses of prospective investors in your application]. ii) it gets you onto HMRC’s radar for the second stage which is to complete and file forms SEIS1 / EIS1 which is necessary for the investors to be able to claim the tax relief. If you haven’t applied for advance assurance, HMRC generally ask all of the sorts of questions that would have been covered in the advance assurance application in any case.
4. If you foresee that you will be seeking to raise both EIS cash after a SEIS round then apply for both within a single advance assurance application. [Update: the most recent version of the HMRC form now more easily allows for the two boxes to be ticked}
5. Take care if you are a software company and will be generating revenues from licence fee income (as most will). You will be relying on a carve-out from an otherwise non-qualifying ‘excluded activity’ – in receiving royalty or licence fee income – which states that you can qualify as a SEIS / EIS company only if the whole, or greater part, of the underlying intellectual property that generates the revenues is created by your company.
I hope you find these tips useful. If you need more, you could subscribe for this free SEIS/EIS course (below) and/or you could reach out for specialist assistance here.
I am getting a lot of questions at the moment about the process for raising funding under Seed EIS and where the advance assurance fits in?
The Advance Assurance is a mechanism that allows companies to pre-qualify themselves with HM Revenue & Customs (HMRC) as a qualifying company for the purposes of raising funding under SEIS. It is not obligatory – although it is good practice. Most sophisticated investors will insist that the company has received advance assurance from HMRC of its qualifying status before investing as do many of the crowd-funding sites.
The other factor to take into account in deciding whether or not to seek advance assurance is that when you get to the stage of filing your SEIS compliance statement with HMRC (in order to secure the tax certification for the investors to allow them to claim their SEIS tax relief), if you haven’t already filed an advance assurance, the likelihood is that you will have to answer a series of questions from HMRC regarding the company’s qualifying status much like you would have completed at the time of the advance assurance – so you may as well have gone for it in any case and got yourself on HMRC’s radar as well as gaining comfort for the investors from the outset!
The process for seeking advance assurance is to use HMRC’s own SEIS advance assurance application form. If your facts are particularly complex or you would like assurance in relation to certain aspects then I tend to supplement the form with a letter to ensure that I have disclosed all of the relevant facts – so there is no come-back further down the line…
If you would like any assistance in relation to the Seed EIS advance assurance process then you can drop me a line here or at my specialist advisory firm, ip tax solutions.