Emma Brown Tax Transactions Partner

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Emma Brown

Tax Transactions Partner

Emma leads our transaction tax team. She joined Wilson Wright in 2014 and became a partner in April 2019.

Emma has a depth of experience of advising entrepreneurs and owner-managed businesses and across a wide range of complex taxation matters relating to both personal and corporate tax. Her expertise includes of corporate reconstructions, M&A, EMI and EIS.

Her attention to detail and her ability to explain complex technical matters in a way that people understand, puts clients at ease. She delivers pragmatic commercial advice and ensures that clients’ best interests are preserved at all times.

Emma sits on the global tax committee of DFK International, reinforcing her strong international links on cross border transactions, and she was a finalist in the 2019 for a prestigious Tolley’s Taxation Award.

Emma is a member of Chartered Institute of Taxation and the EISA.

10 Aug 2022

Emma Brown and Richard Wernick look at some of the key issues linked to a successful EIS/SEIS advanced assurance application.

Utilising the EIS and SEIS tax reliefs can be a very attractive way for companies to raise finance from individual investors, who, in turn, appreciate the income tax and capital gains tax benefits that these venture capital schemes offer.

This article assumes that company owners and directors are familiar with the broad requirements of the two schemes and deals with the problems which Wilson Wright have encountered in applications and how to avoid them.

Issues common to both EIS/SEIS

Investor Loans

In order to qualify for the SEIS/EIS tax reliefs, there cannot be any loans to the investor or their associates, which are linked to their subscription for shares in the company during the period from the company’s incorporation to the third anniversary of the date of the share issue.

Ordinary shares only

As a quid pro quo for investors receiving tax advantages, they must face an element of risk.  As a consequence, the shares issued to them in the framework of either or both of the two schemes can only be ordinary shares.

As part of the approval process, the issuing company will need to confirm that the shares issued to investors are ordinary shares which, during the period from the date of issue of the shares to the third anniversary of that date, carry:

• No present or future preferential right to dividends where either:
• the rights attaching to the share include scope for the amount of the dividend to be varied based on a decision taken by the company, the shareholder or any other person; or
• the right to receive dividends is ‘cumulative’ – that is, where a dividend which has become payable is not in fact paid, the company is obliged to pay it at a later time, normally once funds become available.
• No present or future preferential rights to the company’s assets on its winding up; and
• No present or future right to be redeemed.

Issuing SEIS and EIS shares on the same date

We recommend that the documentation for an SEIS issue and an EIS share issue, which are planned to be consecutive, are carefully segregated since SEIS shares should be issued prior to any EIS shares in order to preserve entitlement to both reliefs.

If SEIS and EIS shares are issued on the same date, the shares in respect of SEIS will not qualify for relief under SEIS (in such an unfortunate situation, it may be possible to claim EIS in respect of all the shares).

High-levels of subcontracting

Many companies find it convenient and more cost-effective to sub-contract out particular activities where they lack in-house expertise. HMRC will not accept that an EIS/SEIS company sub-contracts the majority of its trading activities to third parties, as this indicates the risk-to-capital condition may not be fully met.

Mostly part-time staff or consultants

HMRC will want to see evidence that the company has long term growth and development plans, and recruiting staff on a full-time employment basis indicates that the company has such objectives.

As part of the advance assurance process the company must declare the number of full-time employees that the company will have at the time the shares are issued to investors.  If the company has few full-time employees, with most of its workers working on a part-time or consultancy basis, HMRC may be sceptical as to the veracity of the company’s business plans.

Investors having a substantial interest in the issuing company

It is a key condition that investors cannot have a ‘substantial interest’ in the company issuing SEIS/EIS shares.

HMRC have set out the definition of ‘substantial interest’ in their internal guidance as meaning the investor directly or indirectly possessing, or having an entitlement to acquire more than a 30% stake in the company via:

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

An individual is not regarded as having a substantial interest in a company for this purpose, if the company has issued only subscriber shares (that is, those issued as part of the company’s incorporation) and the company has not yet begun to carry on any trade or preparations for any trade.

Issues only related to EIS shares

Company founders, employees and directors

An individual will qualify for EIS relief if they subscribe for shares on their own behalf, or is treated as doing so, and:

• is not ‘connected’ with the company at any time during the period beginning with the incorporation of the company, or two years before the date on which the shares are issued if that is later, and ends the day before the three-year anniversary of the date of issue of the shares; or
• is so connected by virtue of being a paid director of the company, but satisfies the conditions in section 169, ITA 2007.

The second bullet point above does not apply directly to company founders but rather to those investors who wish to become directors of the companies they invest in. HMRC have confirmed that the rules are not intended to discourage ‘business angels’, who are allowed to qualify for income tax relief despite the fact that they receive payment for their services.

An individual is connected with a company if they are, or any associate is:

• an employee;
• a partner, or an employee of a partner;
• a director; or
• a director of a company which is a partner of the company, or of any company which is at any time during the period beginning with the incorporation of the company, or two years before the date on which the shares are issued if that is later and ends the day before the three year anniversary of the date of issue of the shares, a subsidiary of that company.

Trading qualifying period

As a pre-condition for EIS, the company’s trade cannot have been carried out for more than 7 years.  This period does not start with the date of incorporation of the company but only when the company has had its first commercial sale.

An area of risk is when a newly incorporated company has purchased an existing business (or its goodwill and intellectual property), intending to carry on the old company’s trade whilst claiming SEIS/EIS advance assurance.

An EIS qualification is that the company is carrying out a ‘new qualifying trade’ i.e., one which has not been carried on by either the company or by another person for longer than seven years.

If a newly incorporated company plans to solely carry out a historic trade, HMRC will reject the application for EIS advance assurance if this trade is older than seven years.

Issues only related to SEIS shares

Company founders, employees and directors

Under SEIS rules, company founders can qualify for the relevant tax reliefs provided that they are not employees of the issuing company during the period from the date of issue of the shares to the third anniversary of that share issue date.  Moreover, a founder would not be able to hold more than 30% of the issuing company’s shares, unless these were subscriber shares issued at incorporation and the company has yet begun to trade or commenced preparations for any trade.

A company founder may be eligible for tax reliefs if they are an employee and also a director of the issuing company (as an individual is not treated for this purpose as employed by the company if he or she is a director of the company).

Qualifying period

As a pre-condition for SEIS, the company’s trade cannot have been carried out for more than 2 years.  This period does not start with the date of incorporation of the company but only when the company has had its first commercial sale.

An area of risk is when a newly incorporated company has purchased an existing business (or its goodwill and intellectual property), intending to carry on the old company’s trade whilst claiming SEIS/EIS advance assurance.

An SEIS qualification is that the company is carrying out a ‘new qualifying trade’, i.e. one which has not been carried on by either the company or by another person for longer than 2 years.

If a newly incorporated company plans to solely carry out a historic trade, HMRC will reject the application for EIS advance assurance if this trade is older than 2 years.

The Tax Transactions team at Wilson Wright have many years’ experience in advising both companies wishing to raise funds under EIS/SEIS and investors wishing to take advantage of these tax efficient investments and would be delighted to assist.