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Director remuneration, in the context of EIS and SEIS, is a complicated topic. It's important to make sure you remain compliant while taking advantage of the scheme.
We have had several clients recently ask us for clarification around director remuneration when using investor schemes like EIS and SEIS. The confusion surrounded the wording in the HMRC manual that EIS investors cannot be 'a director who receives, or is entitled to receive, remuneration' and whether directors or NEDs could be paid a fee instead of via PAYE.
This raises two issues and in this article we'll explain exactly who is allowed to invest in a company via EIS and SEIS. We'll run through the rules of remuneration. And we'll look into how IR35 and rules about NEDs might affect this.
EIS and SEIS Basics
First, a quick refresher on the EIS and SEIS schemes. Both schemes allow investment into companies with significant tax relief advantages.
SEIS is designed for small companies and start ups. EIS focuses on larger companies (with investments up to £1m per tax year for the individuals but £12m received into the company). The investor gives money to the company in exchange for shares.
Today's article will focus on who can invest and how they can be remunerated.
SEIS Rules Around Directors
We would start by saying this is a complicated issue and it's important to stay compliant. We would recommend working with an SEIS tax specialist. At the very least, make sure you read the HMRC documentation.
You are not allowed to invest in a company (via SEIS) as an employee of the company. With one condition, you can invest as a director. You can become a director before or after the investment and still qualify as long as this is before being paid remuneration.
You can receive the benefits (tax relief) of the SEIS scheme as a director even if you receive (reasonable) remuneration.
EIS & Business Angels
EIS investors may become unpaid directors as long as they are appointed after the investment is made. This is a crucial difference to SEIS.
HMRC also allows paid directors to take advantage of the scheme as long as they can be considered "business angels". It says that the EIS scheme is...
... not intended to discourage investors who would like to become directors of the company they invest in (or of a subsidiary) and make their business expertise available to it.
Such investors are often known as ‘business angels’. Business angels are allowed to qualify for Income Tax relief despite the fact that they receive payment for their services
In order to be considered a business angel, you must become:
- A director
- Who received (or is entitled to receive) remuneration
In this context, remuneration:
- Includes benefits
- Must be reasonable in amount
You must have become a director after the shares were issued. So you just need to make sure you do things in the right order:
- Subscribe for the shares
- Receive the shares
- (Only then) Become a director
- Receive remuneration
Tax Relief For EIS & SEIS
For SEIS, the rules around tax relief are very simple. As HMRC says: "For SEIS, you can get tax relief if you’re a director of the company".
EIS is more complicated. If you were a paid director at the time the shares were issued you cannot receive a salary but only receive non-remuneration income such as:
- Reimbursement of expenses
- Interest on loans
- Dividends (within normal returns)
- Payment for goods, commercial rent or services provided
You may be able to claim tax relief if you were an unpaid director at the time the shares were issued.
If you have any questions about either scheme, please get in touch. We founded Key Business Consultants as an EIS/SEIS tax specialist firm.
Non-Executive Directors & IR35
The rules as described above would allow non-executive directors to benefit from an EIS scheme. The Investors Chronicle explains:
Angel investors who have had previous experience of running businesses, and understand the trading sector they are invested in and who may also attend board meetings or act as a non-executive director, may be best placed to manage their investments and exposure to risk.
Angel investors could, in theory, be paid as consultants for other non-NED services on an arm's length basis. The contract would be important on this point, however this may be complicated by recent changes to IR35 legislation. NEDs, like directors, are required to be paid through PAYE and some confusion surrounded whether being paid through PAYE negated the EIS investment but close reading of the legislation confirms that as long as the timing of the directorship for EIS is adhered to then the investment is valid.
If a contractor/consultant is considered by HMRC to be a "disguised employee", they would fall under IR35. This would mean they would have to pay tax like any normal employee via PAYE.
If an angel investor was billing the company as a consultant, but was a de facto employee, this would complicate the EIS rules. In this case, we would recommend getting some professional advice from an EIS/SEIS tax specialist.
We have a huge amount of experience helping companies and individuals with these schemes. We can give you advice, represent you to HMRC and help you attain advanced approval.