February 2012

The government’s stated aim is welcome; to help smaller, riskier early-stage companies to overcome the barriers they face in raising external finance; the question is whether the restrictions inevitably attached to such initiatives risk strangling them at birth. First signs are not encouraging; the draft Seed Enterprise Investment Scheme (SEIS) legislation published at the time the new relief was announced stretches to 47 pages.

The government itself doesn’t seem overly confident in the success of the idea. Its own figures indicate a cost to the Exchequer, once SEIS has settled down, of only £20m a year.  With the relief being given at 50 per cent, this implies £40m of funds raised. At the maximum per company of £150,000, this is only 266 companies or, at the individual investor limit of £100,000 a year, only 400 business angels. Either way, it all feels rather modest.

Looking at the detail, from 6 April 2012 companies which have been incorporated for less than two years, with fewer than 25 employees and with assets of £200,000 or less, may take advantage of the scheme. It is worth noting that the investment must be in the form of shares, not loans that are generally more flexible. Also, the £150,000 the company can raise is a cumulative and not an annual limit. 

There are three interesting conditions. First, the draft rules make reference to ‘a genuine new venture’.  It is clearly not the aim to allow existing businesses to be reorganised into new companies to take advantage of the new relief, although what is a genuine new venture may raise some interesting discussions, especially for businesses looking to expand into new areas of operation.

Second, there is an outright prohibition on companies in partnership. The suspicion must be that the revenue has recognised the increasing popularity of corporate partners and have concerns that a simple way around the fairly low financial limits would be to incorporate a number of qualifying SEIS companies, each of which could then have been a partner in a much larger underlying business.

And third, the company must not be ‘in difficulty’. This isn’t formally defined, but the underlying principle is that the business must not be in a position where it cannot stem losses which will otherwise almost certainly mean it will go out of business in the short or medium term. 

In targeting this new incentive, the government has clearly wanted to make it attractive to individuals who, when interest rates are low, might consider a modest share investment, but might be put off by the all too well publicised risks. So the 50 per cent rate of relief applies irrespective of the individual’s own rate of tax. Also, in year one there is an additional ability to exempt capital gains made in the year into the SEIS investment giving a maximum value of 78 pence for every £1 invested. Put another way, the government is happy to underwrite nearly four fifths of the risk.

Bear in mind though, that while the investor can be a director, and not just an employee, he or she cannot own more than 30 per cent of the shares. We await with interest to see whether the new regime flushes out rather more than the few hundred business angels the government seems to be anticipating, or whether SEIS will turn out to have rather more clout.

Mike Hodges is a Tax Partner, Mazars, Manchester. If you would like to ask the author a question on this or a related topic, email: emc2@mazars.co.uk