Sowing the seeds of enterprise and other tax changes
Tax relief of up to 78% will be available for investments in new small companies under the Seed Enterprise Investment Scheme (SEIS).
This was one of several proposals in the Chancellor’s Autumn Statement on 29 November aimed at stimulating growth. However, the investment risks will be high and it will not suit faint-hearted investors.
The scheme will be similar to the existing enterprise investment scheme (EIS), but it will be targeted at companies that are not more than two years old and are carrying on, or preparing to carry on, a new qualifying trade. Investors will benefit from income tax relief at 50%, regardless of the rates at which they actually pay tax on their income.
The potential for the extra 28% tax relief comes from an exemption from capital gains tax (CGT) on gains realised from disposals of any assets from 6 April 2012 to 5 April 2013, provided the gains are reinvested through the SEIS in the same period.
The company’s gross assets before issue of the SEIS shares must be not more than £200,000 and the number of its full-time equivalent employees must be less than 26. The company must have a permanent establishment in the UK and not have benefited previously from EIS or venture capital trust investment. Directors, but not employees, will be able to invest in their own companies provided they own less than 30% of the company’s shares.
To comply with the European Commission’s state aid rules, the company must meet a ‘financial health requirement’ at the time the shares are issued; so a SEIS investment cannot be used to rescue a company in difficulty. A company will be able to raise up to £150,000 in total and the maximum investment for an individual will be £100,000 a year. There must be no prearranged exit for investors and the company’s trade must be a genuinely new venture.
If you are attracted by the tax relief, do your research before investing. Around one in three new ventures fails in the first three years.
Other changes
The Autumn Statement confirmed that the rate of research and development (R&D) relief for small and medium enterprises will increase to 225% from its present 200%, and that companies will no longer have to spend at least £10,000 on R&D to qualify for relief. Furthermore, from April 2012, claims will no longer be limited to the amount of the company’s PAYE and national insurance contributions liability.
Among other proposals are that businesses in the Humber, Black Country, Liverpool, North Eastern, Sheffield and Tees Valley enterprise zones will be able to claim 100% first-year capital allowances for plant and machinery investment for five years from April 2012. The small business rate relief holiday will be extended for six months from 1 October 2012 and businesses will be able to defer 60% of the inflation increase in their 2012/13 rates bill to be repaid equally over the following two years.
The capital gains tax annual exemption for individuals will be frozen at £10,600 for 2012/13. From 2013/14, it will normally rise in line with the consumer prices index like most other tax allowances.