April 27, 2012

ENTERPRISE INVESTMENT SCHEME (“EIS”)

Increase to Thresholds

Legislation introduced in the Finance Bill 2012 will increase:

• the maximum annual amount that can be invested in an individual EIS company, to £5 million;
• the gross asset threshold to no more than £15 million before EIS investment and £16 million after; and
• the employee limit to fewer than 250 employees.

Subject to State aid approval, these changes will apply to shares in investee companies that are issued on or after 6 April 2012.

The total amount of investment which a company may receive in a 12 month period from any State-aided risk capital measure, including EIS and VCT, will be restricted to £5 million.

The legislation also increases the annual amount that an individual can invest under the EIS to £1 million. This has already received State aid approval and will apply to the tax year 2012-13 and subsequent years.

EIS Amendments

The Finance Bill 2012 also includes provisions to:

• disregard loan capital for the purposes of the 30% “substantial interest” limit: an investor cannot obtain EIS relief if he has a substantial interest in the company. This rule will be relaxed so that whilst his interest must not exceed 30% of the equity/voting capital, loan notes will no longer count for the purposes of this test;
• allow shares with certain preferential right to dividends to qualify;
• provide that spending money on acquiring shares/stock in a company is not a qualifying trading activity; and
• remove the £500 minimum investment limit.

Anti-avoidance Rules

The Finance Bill includes the anti-avoidance provisions announced in the December 2011 Pre-Budget Statement. The aim of these anti-avoidance rules, which will apply equally to EIS and SEIS (see below), is to outlaw contrived, artificial arrangements where existing trades are hived off simply to access the tax reliefs, or used to route EIS/SEIS funds through a company lacking substance or risk.

To counter abuse HMRC are not, as they threatened last Summer, introducing a test based on a minimum number of employees or tainting characteristics to stop non-commercial trades and schemes, but rather a new disqualifying purpose test. The test will disqualify shares which are issued subject to arrangements whose main purpose is to generate access to the reliefs in circumstances where either:

• the benefit of the investment is passed to another party to the arrangements (or to a connected person); or
• absent the arrangements, it would be reasonable to expect that the business activities would otherwise be carried on by another party to the arrangements.

“Arrangements” is very widely defined and can include any agreement or understanding, whether or not legally enforceable.

It is obvious that many of the artificial schemes that have been implemented historically will be prevented in future, but with care and sense, EIS should continue to be a fruitful source of funding in the media sector. The legislation is broadly drafted, and whilst a number of comments were made to HMRC in the Consultation Period since December 2011, these have not been adopted. However, HMRC do offer an advance assurance process pursuant to which they will confirm whether a company and its proposed activities will qualify for EIS, and this review should cover these anti-avoidance rules. We can assist you with any proposed scheme and, if appropriate, seek HMRC confirmation that it will qualify.

The above changes will take effect in relation to shares issued on or after 6 April 2012.

SEED ENTERPRISE INVESTMENT SCHEME (“SEIS”)

The new scheme will:

• give income tax relief at a rate of 50% of the amount invested by an individual (regardless of marginal rate) with a stake of less than 30% in a company, including directors (but not employees (other than previous employees));
• apply to subscriptions of shares issued on or after 6 April 2012 (until 2017);
• have an annual limit of £100,000 per investor with carry back to the previous year of unused amounts;
• have a limit of £150,000 on SEIS funds raised by a company, as a cumulative total limit taking into account the SEIS investment then being raised and any other SEIS investment into the company in the 3 years to the date of the investment;
• apply to early stage companies carrying on, or preparing to carry on, a new business in a qualifying trade;
• be available to “small” companies – i.e. which do not have gross assets in excess of £200,000 immediately before the SEIS issue, nor more than 25 employees;
• be available to a singleton company or a group; and the income tax relief will be reduced or withdrawn if the SEIS investor sells his shares within 3 years.

In addition to the 50% income tax for relief, the scheme will provide a CGT holiday for 2012-13 only: gains realised on disposals of assets in 2012-13 that are invested in an SEIS company in the same year will be exempt from CGT. Moreover, disposals of SEIS shares after a three year period will be exempt from CGT.

As with EIS, if a capital loss is realised on the disposal of the SEIS shares, the investor may claim this loss (net of income tax relief) against income tax for that year or the preceding year.

Requirements for SEIS Investor

Substantial Interest/Connection: An investor cannot be connected with the SEIS company – i.e. broadly he cannot own (or be entitled to own in the future) more than 30% of the ordinary shares/votes/issued share capital or rights which would give him 30% of the assets of the company on a winding up.

Directors: Individuals who are directors or previous employees can be investors (but an existing employee cannot qualify unless also a director). SEIS investors must not subscribe for the shares as part of a wider arrangement which includes somebody else subscribing for shares in a company in which the investor has a substantial interest. There must be no loans to the investor which are linked to their subscription for shares.

New Qualifying Trade

The funds raised must be for the purpose of a NEW qualifying trade carried on by the SEIS company or its qualifying 90% subsidiary – i.e. a genuine new venture. A new qualifying trade is one which is less than 2 years old (and it can be one which is transferred to the SEIS company). Unlike with EIS, there is no requirement that the trade must actually be started within any specified time period, just that the ultimate intention is to trade. (Note that in EIS the investor is only entitled to claim tax relief once the EIS company has been trading for 4 months – there is no such requirement in SEIS – see below “Spending of Funds Raised”.)

Throughout the period of 3 years from the SEIS issue, the company must exist wholly for the purpose of carrying on the new qualifying trade(s) (or be the parent company of a qualifying trading subsidiary/group) although if not actually trading it can be preparing to trade or doing R&D. Qualifying trade has its restricted EIS meaning i.e. no asset backed, financing etc. trades. Licensing intellectual property and receiving royalties is expressly allowed provided the SEIS company created at least half the value of the relevant IP.

Spending of Funds Raised

The money raised must be employed on the qualifying business activity within the 3 year period (save that insignificant amounts can be spent on other purposes or remain unspent). No SEIS relief will be given until 70% of the SEIS funds have been spent. Before an SEIS company can raise EIS funding, it must have spent at least 75 % of any SEIS monies it raised.

Other Requirements for SEIS Company

The shares which qualify for SEIS relief must be ordinary shares fully paid up in cash. Shares carrying certain preferential dividends are also permitted. Shares can carry votes or be non-voting.

An SEIS company cannot have raised any previous funding under the EIS or VCT regimes.
As with EIS, the SEIS company must be unquoted, independent (i.e. not a 51% subsidiary or otherwise under the control of another company), have a UK permanent establishment and not be carrying on the trade in partnership.

The SEIS company must not be in financial difficulties. The SEIS company can have subsidiaries. There must be no arrangements underwriting the equity risk or pre-arranged exits (e.g. loans/repayments/abnormal dividends).

There are the usual prohibitions on value received by shareholders. Moreover, SEIS tax relief will be withdrawn/reduced if within the 3 year period:

• the shareholder acquires a substantial interest in an SEIS company;
• the company loses its qualifying status; or
• the investor disposes of his shares (including through options), but death is excluded!

Please contact your usual contact at Wiggin or Sue Crawford (E: sue.crawford@wiggin.co.uk; T: +44 (0) 20 7927 9685) to discuss any of the above.

WIGGIN LLP
29 MARCH 2012