The new world definitely brings new opportunities. Opportunities require funding. Rumour has it that taxes will rise but it would be a harsh (not to mention foolish) government that takes an axe to SEIS and EIS investment relief – one expects that Rishi will not go there.
The Institute of Directors calls for the Government to support start-up investment by increasing the tax reliefs and the areas of business which can qualify. However, as the Government has yet to expand the SEIS and EIS this may leave some entrepreneurs questioning whether their new business ideas will benefit. So, looking at emerging technologies we explore what new post COVID ideas could ignite interest from investors lookingfor SEIS/EIS relief.
Brainy is a young entrepreneur. His technology business, focussing on coding, Artificial Intelligence and robotics has just created the first robot that will be capable of administering the COVID-19 vaccine. Sid is assisting Brainy, working as a specialist accountant that focuses on start-up businesses in the technology and AI space.
Whilst the vaccine is still being tested and prepared Betty takes an electric car using a pooling service – to go and get a COVID-test. The test is carried out at a pop-up chemist based in the function room of a new hotel. Once the test is completed, the samples taken from Betty are transported to the laboratory by a lorry that carries COVID test samples, and will also be used to transport vaccines around the country.
So, based on the above example, what businesses would be considered a qualifying trade for SEIS and EIS purposes?
Firstly, does Brainy’s business that has created a vaccine dispensing robot qualify?
Yes, investors into this business would qualify for SEIS and EIS. If Brainy later decided to licence the software his company created, an investment into the licencing would also still qualify. Royalties are excluded from SEIS and EIS unless the company has created the intellectual property itself. The funds raised from investment then used to develop the robot’s technology would also attract R&D tax credits which can lead to up to 230% of expenditure on research or development being paid back by HMRC.
Brainy’s business has been operating for less than two years with fewer than 25 employees and gross assets of less than £200,000 so the company can qualify for SEIS as well as EIS (provided the SEIS shares are issued at least one day before the EIS shares). SEIS is aimed at smaller and risker businesses hence the tax reliefs are greater than those available under EIS to encourage investment.
The maximum investment that can be raised with full tax reliefs for investors is:
Up until end of January 2021 the Future Fund is making grants of between £125,000 and £5,000,000 to businesses who have already raised funds on a matched funds basis. Funds already raised by SEIS and or EIS count towards matched funds and the SEIS and EIS investments already made will not be impacted by Future Fund funding.
Will Sid’s specialist accountancy practice focused on start-up business in the technology industry qualify for SEIS and EIS?
The answer here is simply no. Providing legal or accountancy services is considered to be an excluded activity for SEIS and EIS.
Betty used an eco-friendly electric car-pooling service to get her COVID-test. Would the company who provide this service qualify? This could depend on the terms under which you use the car. Leasing or letting assets on hire is considered to be an excluded activity for SEIS and EIS purposes. Therefore, it could be considered that when you use the car-pooling service, you are leasing/hiring that car. If this is the case, the Company would not qualify for and EIS. However, if it was a business creating a website where individuals could search out electric cars of individual owners for rent, that would qualify because the Company itself would not be leasing out the cars.
Pop up chemist
Dental and medical practices are not excluded from SEIS and EIS. Therefore good news the investment into the pop-up chemist trade would qualify so long as the other requirements are met. A chemist is not knowledge intensive so the limit on EIS investment is £12,000,000.
The hotel that is housing the pop-up chemist in their function room would not qualify for SEIS or EIS. Operating or managing hotels, or managing property used as a hotel or comparable establishment is an excluded activity for the purpose of SEIS and EIS.
Lastly, will the company used to transport the tests and vaccines qualify for SEIS and EIS? Transporting goods (other than coal or steel) is not an excluded activity for SEIS and EIS and therefore it is likely that investment into a logistics or courier business would attract tax relief. Development of software will qualify for R&D tax credits. The limit on EIS investment would be £12,000,000. The usual tripwires would apply – the logistics company would need to have gross assets of less than £15m, been operating for less than seven years with fewer than 250 employees to be eligible for EIS.
What are you waiting for? If you are not sure about whether the trade does qualify we can approach HMRC for you. HMRC will want to review your Articles of Association and any Shareholders’ Agreement or investment agreements. We draft or review these documents to make sure they comply. We have summarised some of the interesting trading aspects. There are other hurdles to cross to secure SEIS and or EIS relief and we can take you through those.