Discovering that you are being investigated by HMRC can be very stressful, even if you are...
HMRC has strict rules for both companies seeking investment as well as for the taxpayers investing in an SEIS or EIS share issue.
For its investors to be able to claim and keep the tax reliefs relating to their shares, the company which issues the SEIS / EIS shares has to meet a number of requirements. If the company ceases to meet one or more of those conditions, investors may have their tax relief withdrawn.
For example, the maximum amount of funds that a company can raise through investments qualifying for SEIS is £150,000. Under the EIS the maximum is £5m in any 12 months with a maximum of £12m over the lifetime of the company. There are higher limits for ‘knowledge-intensive’ companies that came into effect from April 2018. There are also qualifying criteria on the maximum number of employees, trading history and the company’s gross assets.
A company looking to raise finance using both the SEIS and EIS must raise investment first using the SEIS before moving on to the EIS. However, it is possible to apply for both the SEIS and EIS at the same time. This means that once the company passes the £150,000 SEIS limit they will almost immediately be able to move on and raise additional funds of £5,000,000 or more using the EIS
One of the most important and often overlooked requirements is that in order to qualify for SEIS / EIS the company raising the finance must continue trading for at least 3 years from the time the SEIS / EIS shares were issued. This is a reasonable condition as it encourages the longer-term growth of new companies. If the company goes into liquidation, HMRC will usually not seek to claim back tax incentives from investors.
However, HMRC is clear that tax relief can be withheld, or withdrawn from investors if the company doesn’t follow the 3-year rule. For example, a start-up exit such as a third-party sale within the 3-year period. HMRC also has the power to withdraw tax relief if the investor sells their shares within the 3 year period.
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