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Venture Capital Schemes: Ways of Raising Finance for Your Business

Abul Nurujjaman, 



 

 

HMRC Approved Investment in EIS, SEIS & VCT

 

What are they?


EIS was created to encourage investors to buy new shares from small unquoted trading companies that of high risk so that they could raise finance by giving investors a wide range of tax relief benefits when they invest. It is essential that for this scheme to profitable for the investor in order to provide finance the company they need to inquire into the rules the company have to observe, not only during the period of investment but also three years after.

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This scheme has two focuses or parts:

 

1) Investor focus: The investor should ensure that the shares are issued to them upon payment in cash and registration of the payment or else this could led to them not being able to claim relief. This can occur when a new company takes a long time to create a bank account and payment for shares is not recorded until this as occurred. This happens when shares of a new company is being issued out as part of the registration process at Companies House. Investors and companies are advised to make sure that shares that are proposed, will not be issued during the period of registration in order to claim EIS relief.

 

Investors have to ensure that their shares are ordinary shares that have a lot of risk attached to it, and should not be redeemable or carry any special rights to the firm or company s assets in the event of the firms dissolution. Shares should only carry limited special rights to the companies dividends.

Shares should not include rights such as the rights involving or attached to the scope for the sum of dividends to be founded on a decision made by the company, the shareholder or anybody with a position of authority. Shares should not include rights where the right for individuals to receive dividends is cumulative , this is where a dividend which is due is not paid, the company is obligated to pay later on, when money has become available.

 

 


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2) Competition focus: Investors that use EIS have to be able to claim tax reliefs in relation to their shares if they cannot, the company that issues these shares has to fall under certain regulations like;   the kind of company it is, their trading activities, the sum of money they can raise and the processes involved that money can be used for purposes of trade. HMRC has to be satisfied that the company meets all the requirements which will therefore allow the company to be qualified.

 

The is a kind on company that is allowed to raise money through the the EIS scheme. companies that want to use this scheme have to unquoted company (this means a company whose share cannot be bought and sold on the stock exchange), however it can later become a quoted company without the investors losing their tax relief advantages. This can only occur when there has been no previous agreement for the company s quoted status to change when the shares are issued.

Under the EIS rules companies listed on the PLUS Markets and Alternative Investment Market can raise finance through EIS as long as they meet the requirements, this is due to these changes not being reconsigned stock exchanges. PLUS listed market shares listed at the time of issue will not

recognised under EIS this is due to PLUS listed being recognised as a stock exchange under EIS.

 

There are certain rules for companies when it comes to qualifying. The company:

 

  • cannot have assets exceeding £15 million
  • must no more than 250 full time employees at the point when shares are being issued
  • should not be operating or trading in certain industries 
  • should not will be listed on a stock exchange or have any intention of being listed on stock exchange during the period of investment 

 

What are the different types of schemes are available?

1.     EIS portfolios: this is typically a managed service that will invest in multiple underlying single EIS investments usually up to 20 companies. A benefit of using this scheme is that it will be managed by professionals, on a normal discretionary basis and the EIS relief  is available once the investors have placed their investment in every individual company. Note to investors EIS relief will not be available if the money as only been placed in the portfolio service.

2.     Approved EIS funds: this fund usually has four or more companies attached to the portfolio.  HMRC has to give the fund clearance or a go ahead before the fund is established. It is of no consequence to underlying investments, however, this suggests that the income tax relief is available in the year the fund ends. Capital gains tax deferment is not given until the manager has placed the underlying investments. This fund or scheme has an obligation to invest 90% of the money raised within the year the fund ends. 

3.     Single company EIS: This is typically the scheme that carries the maximum amount of risk for the investor because they are investing in one company. So therefore this will suggest that the investors dividends or returns are tied to that on company s performance. Unfortunately, these companies are typically unlisted so there will be no exit strategy until he company is sold or floated. 

 

Tax Benefits (tax relief and how it be claimed)

The firm is not entitled to income tax relief on the cost or price of shares if they are attached to the company. Company s can be connected or attached in 2 ways; connection by employment and connection by financial interest.

 

Investors cannot claim tax relief until the company sends them a form called EIS3. If the investor uses an approved enterprise investment scheme fund they will get a EIS5 form. Investors can make claims up to 5 years after the first 31 January following the 12 month tax year when the investment was placed.


How to apply for EIS?


Business need to use the EIS/SEIS Advance Assurance Application form to apply for EIS. it is advised that companies use this form before looking at share issue, so that they can check or make sure that they meet all of the conditions necessary to qualify for EIS.

 


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Seed Enterprise Investment Scheme (SEIS)


What are they?


SEIS was created to help small company start ups in the beginning stages of trading to raise finance by giving or providing tax reliefs to individuals investors who buy new equity shares in thses companies. It differs to EIS which provides tax relief to investors that buy shares in high risk small companies.

 

 

Tax Benefits?(tax relief and how it be claimed)

 

Investment requirements in relation to SEIS income tax relief. An investor in SEIS is know as a qualifying investor in respect to the relevant shares if the following requirements are met and also fro investors with UK tax liability which can be used as a basis for setting relief.

The investor should not any:

 

  • employee that are investors
  • substantial interest in the company they are going to invest in 
  • related investment deals or arrangements 
  • loans that are linked 
  • tax avoidance issues 

Investors are not required to UK residents. Relief for investors is available at at 50% of the price of purchasing the shares, on maximum yearly investment of £100,000. Relief is given through a reduction in tax liability, provided that there is a enough tax liability to set it. Investors can make claims up to 5 years after the first 31 January following the 12 month tax year when the investment was placed.

 

Shares have to held by the investor for 3 years, from the day it was issued in order to be able to claim relief. Relief will be withdrawn or deceased if during that 3 year period the investor is discovered to have stopped meeting up with their requirements or if the shares are sold with that 3 year period.

 

 

How to apply for SEIS?


Business need to use the EIS/SEIS Advance Assurance Application form to apply for SEIS. It is advised that companies use this form before looking at share issue, so that they can check or make sure that they meet all of the conditions necessary or requirements to qualify for SEIS.

 

Formal approval from the company after the shares have been issued. The company must fill out a SEIS1 form and it must be sent to SCEC, before the investor can being claiming tax relief.

 


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Venture Capital Trust (VCT)


What are they?


A VTC is approved by HMRC as a company that is similar to an investment trust which subscribes for shares in and lends funds to small unlisted companies. Using this scheme greatly benefits its investors though specific tax reliefs.

 

VTC scheme was created to encourage investors to invest in small unlisted companies. Investors can finance these small companies by holding shares in a venture capital trust. The VTC goes on to use those funds to invest in small unlisted companies, allowing investors have a diversified portfolio thereby spreading risk though holding ordinary shares.


What are the different types of schemes are available?

 

1.     Generalist  VCT s: this type of trusts invest in a lot of different industries and points in development. 

2.     Specialist VCT s: this type of trusts invest in a specific industry such as cosmetics.

3.     Limited  VCT s: this type of trusts have a time limit to invest such as a 5 year plan on when to withdraw investment and stop VCT at the end on their planned period.    

 

Tax Benefits or advantages 

 

1.      Venture Capital Trust is completely exempt from corporation tax when it comes to chargeable gains and also losses on chargeable purposes are not permissible losses. 

2.     Capital gains tax (CGT) is exempt for individual investors upon the disposal or sale of ordinary shares within the accepted maximum of £200,000.

3.     Front end  income relief on taxes is available and can be claimed by individual investors on subscriptions up to the limit of £200,000.

4.      Income tax on dividends is available and can be claimed by individual investors in dealing with ordinary shares bought within the permitted or accepted maximum of £200,000.

How to apply for them?

 

Investors can apply for this scheme through a venture capital trust (VCT) which are similar to investment trusts, with both being managed by fund managers. So investors can subscribe for shares in a VCT which will then lead to them investing in trading companies that qualify and meet the schemes criteria.


Disclaimer: The information provided in this blog is brought to you by Taj Accountants. As you are reading this blog of your own free will, any information taken from this blog is at your risk. Before using the information provided to apply, to your business seek professional or legal advice.Taj accountants will not be liable for any damages.

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