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Tax Avoidance and Withdrawal of EIS Tax Reliefs

Gary Green
Gary Green
July 26, 2016

The Seed Enterprise Investment Scheme (SEIS) was launched by the government to drive investment in the early development of high potential growth businesses.

Used properly, the scheme is a highly tax-efficient way of investing in new companies. However, the generous terms of the scheme also appeal to taxpayers looking to exploit the scheme for tax avoidance purposes.

Fortunately, we do not get many of the following examples of potential tax avoidance. However, we do like to take our clients’ challenges and find out the technical answer as to what is permitted and what is not under the ever-changing tax legislation. It is also very important to have an SEIS tax specialist consultant on board throughout your investment period. You don't want to accidentally fall foul of the rules.

What The Rules Say

The rules are clear. An investor can only claim SEIS relief where the investment is made for genuine commercial reasons. Where the main purpose, or one of the main purposes, of an investment is the avoidance of tax no tax reliefs would be available.

The legislation also includes clauses to prevent reciprocal arrangements. So you can't use the scheme if one investor invests in a company in exchange for another investor investing in his or a related person's venture.

There are also special rules in relation to linked loans. There can be no loans by the company to the investors or their associates which are linked to their SEIS investment. A linked loan would not have been made, or would not have been made on the same terms, were it not for the SEIS investment.

The "Substantial Interest" Rule

The legislation stops investors who hold a substantial interest in the company (at any time from incorporation of the company to the termination date) from investing. A substantial interest is...

  • an investor directly or indirectly possessing
  • or having an entitlement to acquire
  • more than a 30% stake in the company
  • or a 51% subsidiary of the company

.. via one of the following:

  • ordinary or issued share capital
  • voting power
  • rights on winding up
  • having control of the company

An employee of the company can't invest in the SEIS scheme belonging to their employer. However, a director (not an "employee" in this context) may invest once the other conditions are met.

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