Venture Capital Schemes, What Is the Best Choice?
When it comes to investment opportunity, new companies are always a risk. In the UK only 40% of start-ups survive the first 3 years of business. This alarming statistic tends to put investors off from putting money into these younger companies. However, this is where the Government has provided Venture Capital schemes to entice investors to invest in new businesses. These schemes offer ample tax relief to investors which in return, encourages them to invest.
What are the schemes?
There are 4 main venture capital schemes which can help to raise money for the progression of your company. There is the enterprise investment scheme (EIS), Seed enterprise investment scheme (SEIS), Social investment tax relief (SITR) and Venture capital trust (VCT). These schemes are created to encourage small or medium sized companies to grow by appealing to investors.
The schemes offer tax relief for individuals who purchase and hold shares, bonds or assets for a set period of time.
The Enterprise investment scheme (EIS)
EIS is a scheme designed so companies can raise money to grow their business. It offers tax relief to individual investors who buy new shares in the company.
How can you qualify for EIS?
A company can qualify for EIS if it has no more than £15million in gross assets, less than 250 employees and it has been more than 7 years since its first sale.
You can raise up to £5 million each year in the EIS scheme, with a maximum of £12 million in the company lifetime. However, the company must receive investment under a venture capital scheme within 7 years of its first sale.
What money raised can be used for
The money gained from the issue of a new share must qualify as one of the following business activities:
- a qualifying trade
- preparing to carry out a qualifying trade (which must start within 2 years of the investment)
- research and development that’s expected to lead to a qualifying trade
The money raised by the new share issue must:
- be spent within 2 years of the investment, or the date you started trading
- not be used to buy all or part of another business
- pose a risk of loss to capital for the investor
How much tax relief you will receive
With the EIS scheme, you can get relief at the rate of 30% on the aggregate of the amounts claimed for shares issued to you in tax year 2020 to 2021.
However, you cannot get relief on more than £2 million, any amount in excess of £1 million can only be for investments in KIC (Knowledge and Innovation committee). If your tax liability is not high enough to absorb all the relief, you have to forgo the excess. In either of these cases, you can opt for the relief to be attributed to certain shares, or to be attributed proportionately to all the shares.
For example, if you have placed £250,000 for shares in each of 4 companies, but you’re limited to claiming relief on £500,000. You could opt for relief to be given at 30% on the subscriptions for all the shares in 2 of those companies, or you could opt for relief to be given at 15% on all the shares in the 4 companies.
When you issue the shares, you must pay them up in cash and in the full amount. Your company should have a way to accept the payment before the shares are issued.
Seed enterprise investment scheme (SEIS)
SEIS is like EIS as it is also a scheme that encourages investors to put money into your company by rewarding them with tax reliefs when they buy new shares in your company.
How can you qualify for SEIS?
A company can qualify for SEIS if it is less than 2 years old, has no more than £200,000 in gross assets, less than 25 employees and have not previously carried out a different trade.
In the SEIS scheme the maximum investment you can receive is £150,000 which includes any other de minimis state aid received in 3 years up to and including the date of the investment. Any investment will also count towards the limits for later investments through other venture capital schemes.
How much tax relief you will receive
You can get relief of 50% on the amounts claimed for shares issued to you in the tax year 2020 to 2021.
However, you cannot get relief on more than £100,000 and if your tax liability is not high enough to absorb all the relief, you have to forgo the excess. In either of these cases, you can opt for the relief to be attributed to certain shares, or to be attributed proportionally to all the shares.
For example, if you have placed £50,000 for shares in each of 4 companies, but you’re limited to claiming relief on only £100,000. You could opt for relief to be given at 50% on the subscriptions for all the shares in 2 of those companies, or you could opt for relief to be given at 25% on all the shares in the 4 companies.
If you’ve received investment from EIS or a venture capital trust then you cannot use SEIS.
Social investment tax relief (SITR)
SITR is a state aid that is designed to financially support your trade. The scheme is in the interest of community companies, community benefit society with an asset lock and charities. SITR offers tax relief on shares they buy and money that they lend to your enterprise.
How can you qualify for SITR?
Your company cannot have more than £15 million in gross assets before investment, have more than 250 employees, be controlled by another company or have more than £16 million in gross assets immediately after the investment is made.
For 3 years after the investment, you cannot be controlled by another company, be quoted on a recognised stock exchange, be in partnership or control another company that is not a qualifying subsidiary.
The maximum amount of investment you can receive over the lifetime of your enterprise is £1.5 million. Any investments under SITR will also count towards any limits for later investments through any of the other venture capital schemes.
Venture capital trust (VCT)
Venture Capital Trusts are companies that have been approve by HMRC and which lends money to smaller companies for in return they receive tax reliefs. The scheme is built to encourage investment into smaller companies.
The VCT invests in a variety of spread smaller companies which allows investors to spread their risk just as they would from holding shares in a normal investment trust company.
Benefits of VCT
VCT is exempt from corporation tax on chargeable gains. Individual investors can claim income tax relief on subscriptions up to £200,000. Futhermore, Individual investors are exempt from income tax on dividends in respects of ordinary shares acquired within the £200,000 maximum. Individual investors are exempt from capital gains tax on the disposal of ordinary shares acquired within the £200,000 maximum.
- Front end income tax relief
- Exemption from income tax on dividends
- Exemption from capital gains tax on disposals
There are many different venture capital schemes which will help you to progress your company and raise money. Each varies differently from each other which is why it is important to know the difference and pick which scheme is optimal for your business.
Cigma Accounting has expert advice and experience in this matter which can help you to pick the correct scheme to fit your company’s needs.
If you require assistance to do so, please do not hesitate to get in touch.