SEIS: Who passes up a great tax deal?

by Calum Fuller

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14 Jan 2013

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HM Revenue and Customs

OSTENSIBLY, it's a great deal.

Tax reliefs of 50% on investments of up to £100,000; a capital gains tax holiday meaning tax breaks of up to 78% are available until 2014 on investments; and loss relief available for failed ventures, allowing investors to write off more than 100% of capital put into the enterprises.

Variously, it's been described as "unbelievable", "an excellent opportunity for private investors to contribute in exciting young start-ups" and "ridiculously generous", while others have observed that investors can also "mitigate their tax liability by up to 78%, or up to 100.5% should the investment fail."

The taxman is promoting the little-known scheme and specified investors can utilise a method known as ‘carrying back' to circumvent paying capital gains tax on investments in enterprises before April 2014, a year longer than expected.

Despite its attractiveness, reports suggest that take-up has been slow. So why has the Seed Enterprise Investment Scheme (SEIS) been so under-utilised?

Well, one theory is that any expected rush to take advantage of such a good deal has been impeded by an investment limit of £150,000, simply because that figure is not always sufficient to sustain a fast-growing start-up.

That limit could potentially be extended, but that is by no means guaranteed. The capital gains tax exemption is also limited to April 2014, although again it could be extended a further year.

HM Revenue & Customs says the facility is "intended to stimulate equity investment in seed stage companies by offering a range of tax reliefs to investors in such companies" in recognition of "the higher levels of risk attached to investing in very early-stage companies, and of the particular difficulties encountered by them in accessing equity finance".

That may well be, but while those intentions are admirable, there is something of a PR issue here. HMRC has been particularly aggressive – and, some might say, rightly so – on the issue of tax avoidance, and as such, businesses simply do not want to be seen to be mitigating its tax, suggests Jeffreys Henry partner Jon Isaacs.

That campaign by the taxman, ably aided and abetted by the mainstream media, will have made driving taxes down – albeit legitimately – somewhat unpalatable for many start-ups. They simply cannot risk the toxic association with tax avoidance, no matter how tenuous that link might be.

Aside from those concerns, there is also the issue of finding funding in the first place – something which many start-ups find difficult, despite being eligible.

Promoting an enterprise for investment is heavily regulated, too, so marrying eligibility with attractiveness to investment is far from straightforward.

All things considered, perhaps it is not surprising the cumulative effect is a low take-up, but there a very few who would argue it does not have a place and will not give various start-ups and SMEs the leg-up they need.

Perception is the main problem, but other issues, such as the upper limit and time restraint, may need ironing out if a tangible impact is to be made.

Take part in this week's Accoutancy Age debate on tax avoidance by clicking here.

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