For small companies, securing tax-efficient funding is key to growth. By leveraging various schemes and incentives, businesses can minimise tax liabilities while maximising capital inflow. These government-endorsed tax incentives are designed to attract private investment by offering tax reliefs to investors, making it more appealing for them to invest in small and growing businesses.
Key Government-Endorsed Tax Incentives
Several schemes are in place to encourage private investment into businesses by offering income tax reductions, capital gains tax (CGT) deferrals, and exemptions. Here are some notable examples:
Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme (EIS) provides tax relief to individual investors who buy shares in smaller, high-risk companies. Typically, these investments are in high-risk companies with a significant risk of losing the invested capital. Note that, subject to any future legislation, the relief will cease on 6 April 2023.
- Income Tax Relief: 30% on amounts subscribed to qualifying companies.
- CGT Exemption: No CGT arises from the disposal of the shares.
- Loss Relief: If the investment fails, the investor can claim loss relief.
- Holding Period: Shares must be held for three years.
- Qualifying Conditions: The investor must not be ‘connected’ to the company, shares must be new, paid for in cash, and retained for at least three years.
- Funding Limits: An issuing company can raise up to £5 million per year (£10 million for ‘knowledge-intensive’ companies).
- Age of Company: The investment must be made within seven years of the company’s first commercial sale (ten years for ‘knowledge-intensive’ companies).
Seed Enterprise Investment Scheme (SEIS)
The Seed Enterprise Investment Scheme (SEIS) is similar to the EIS but aimed at start-up companies with fewer than 25 employees and assets of less than £350,000, whose trade is less than three years old.
- Income Tax Relief: 50% on amounts invested, up to £100,000 per tax year.
- CGT Exemption: Shares are exempt from CGT if held for at least three years.
- Loss Relief: A loss can be offset against the investor’s income.
- CGT Reinvestment Relief: Up to 50% of the reinvested gain is exempt from CGT.
- Funding Limits: The issuing company can raise up to £250,000 in total.
Equity Crowdfunding
Equity crowdfunding allows investors to put smaller amounts, typically between £1,500 and £4,000, into a single business, sometimes even less. This method provides a more accessible entry point for individual investors and offers tax reliefs via SEIS and EIS.
- Tax Relief: Investors can claim CGT or income tax loss relief if the equity shares report a loss or become devalued.
- Platforms: Examples include Seedrs and Crowdcube.
Practical Insights
For start-ups and SMEs seeking external funding, utilising tax-efficient investment schemes can be highly advantageous. These schemes make a company more attractive to potential investors and provide a vital source of funding at a cheaper cost than traditional bank loans.
Need Help Navigating Investment Incentives?
Understanding and leveraging these tax incentives can significantly impact your business’s ability to attract investment. For expert advice and personalised support, contact Jon and the team at Jon Davies Accountants. We’re here to help you navigate these schemes and maximise your funding opportunities.
If you found this useful, please share it using the icons at the side of the page, or leave a comment below.
Any questions?
If you’d like a meeting or a video call to discuss this, please get in touch with your favourite Liverpool accountant
- You can ring us on 0151 380 8080
- You can email us at gr****@*********************co.uk