There are numerous conditions to be met for both EIS and SEIS relief and so the following explanation only includes comments on some of the main issues. However, all conditions would need to be reviewed in detail before proceeding further.
All legislative references mentioned are to the Income Tax Act 2007. All of these parts should be read as if references to the individual include their associates – s166 (spouses, civil partner ancestors or lineal descendants, s.253).
For both EIS and SEIS, the trade must not be, or substantially include an excluded activity – see s. 192. In addition, both reliefs can be withdrawn if value is received from the company or there are other disqualifying events – s.208 and s.257F.
Enterprise Investment Relief
Amongst the requirements for EIS relief found between s.163 and s.171 is a requirement that an individual is not connected to the company at any time from the two years before the share issue till three years after the latter of the share issue or commencement of the trade (s.163).
Connection is defined in s.166 and includes being an employee or director (s. 167). There are however exceptions for directors if, broadly:
- they receive no payments during the above period, subject to some exclusions such as reimbursed expenses (s.168),
- or whose first subscription of EIS or SEIS shares in the company was made before they became a remunerated director, and they subsequently only receive reasonable remuneration for directorship duties (s.169).
Connection also includes any individual who is entitled to acquire more than 30% of the company’s ordinary share capital, issued share capital or voting power (s.170) or rights on a winding up. I presume that this is not an issue in your client’s case.
Therefore, if your client is already a remunerated director, or otherwise connected to the company, he will not be eligible for EIS relief. In which case, SEIS relief should be considered. Even if EIS relief is available, SEIS should also be considered if it is an available alternative.
Seed Enterprise Investment Relief
Providing that a company has only started to trade within the last 2 years, and has commenced a “new” trade, your client may be eligible for SEIS relief by subscribing for qualifying SEIS shares.
No SEIS qualifying shares can be issued after an EIS issue – s.257DK.
Whilst SEIS states that employees cannot claim, this is not the case for directors as it specifically says in s.257BA(2):
“For this purpose, a person is not to be treated as an employee of the issuing company, or of any qualifying subsidiary of that company, at any time when the person is a director of that company.”
As with EIS, there are additional connections tests including the 30% connection mentioned above – s.257BF.
In order to be eligible for SEIS the company must be carrying on a new qualifying trade. A new trade is defined by s.257FH as a trade that has not been carried on by any person for more than two years i.e. the trade must usually be a start-up, not an existing business acquired from another person.
HMRC’s overview of EIS & SEIS can be found at the following links as well as detailed guidance in their Venture Capital Schemes Manual:
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