On investment into a company an application on your behalf will be made to HMRC for the SEIS3 certificate in order to claim SEIS relief on your investment. The application to HMRC cannot normally be made until the company has carried on its trade for a minimum of four months or, if earlier, after the company, has spent at least 70% of the money raised through issue of SEIS qualifying shares. Subject to this, SEIS3 certificates are typically sent out to investors within eight weeks of each underlying investment. The SEIS3 certificate enables you to claim your income tax relief and capital gains tax exemption, normally by making the appropriate entries on your own tax return.
Each company in which an investor invests must initially (i.e., at the time of issue of the shares) not be listed on a recognised stock exchange (as defined for the purposes of SEIS Relief) and there must be no “arrangements” in place for it to become so listed. In addition, throughout the three year SEIS period, it must not be a subsidiary
It must either exist to carry on a qualifying trade or else be the parent company of a trading group and there must be no “arrangements” in existence for the company to become a subsidiary of, or be controlled by, another company. A trading group is a group in which, directly or indirectly, more than 50% of the shares of each subsidiary are held by another member of the group, but any subsidiary employing any of the money raised by the issue of shares must be a qualifying 90% subsidiary. Non-qualifying business activities (broadly, investment activities and non-qualifying trades) must not comprise a substantial part of the business of the group as a whole. The qualifying business activity for which the money is raised by the issue of shares must be a trade conducted on a commercial basis and with a view to the realisation of profit.
Although it is possible for qualifying activities to be carried on anywhere in the world, the company that issues the shares must have a “permanent establishment” (broadly, a taxable presence) in the United Kingdom.
For SEIS purposes, the value of the gross assets of the company and any subsidiaries must not exceed £200,000 immediately before the issue of shares. Subject to certain exceptions, the maximum SEIS fundraising per company is restricted to an all-time maximum of £150,000 and the maximum number of full-time employees (or full-time equivalent) in the company at the time of Investment is restricted to fewer than 25.
It is not possible for a company to qualify for SEIS relief if it has previously issued shares on which EIS Relief has been claimed, or has issued shares to, or received an investment from, a venture capital trust. If a company issues shares on which SEIS Relief is claimed, it is possible for it to issue subsequent shares on which EIS Relief may be claimed.
Most types of trades are qualifying trades for SEIS purposes but the following are excluded:
The trade of the company must generally be less than two years old at the time of the investment. Companies “in financial difficulty” cannot receive SEIS investment. HMRC’s guidelines regard a company as being in financial difficulty where it is unable, whether through its own resources or with the funds which it is able to obtain from its owners, shareholders or creditors, to stem losses which, without outside intervention by the public authorities, will almost certainly condemn it to going out of business in the short or medium term.
Shares only qualify for SEIS Relief if they are ordinary shares which do not, at any time during the three year SEIS period, carry any present or future preferential right to dividends (other than to certain fixed rate non-cumulative dividends) or to a company’s assets on its winding up, or any present or future right to be redeemed.
An investor can obtain SEIS income tax relief only in the tax year in which investments in qualifying SEIS companies are made (i.e. the tax year in which the investor invests), or in the immediately preceding tax year.
Please note that this is only a condensed summary of the taxation legislation and should not be construed as constituting advice which a potential investor should obtain from his or her own investment or taxation adviser. The value of any tax reliefs will depend on the individual circumstances of investors.
Sapphire Capital Partners LLP does not give tax advice and recommends that you consult a tax adviser if you are in any doubt about any of the technical aspects of the SEIS legislation.
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