The Seed Enterprise Investment Scheme (SEIS) is failing to help businesses raise much-needed cash because strict rules are stopping families from investing in their own companies.
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SEIS and the Enterprise Investment Scheme (EIS) limit family shareholdings in companies to 30% of the total number of issued shares.
But business leaders say this limit is choking many companies of funds because they self-finance through their families but cannot access the generous tax breaks offered by SEIS and EIS.
Accountancy firm KPMG Enterprise argues this is unfair as the same people could invest the money in another company unrelated to their family and pick up income tax and capital gains tax incentives.
Iain Moffatt, who heads KPMG Enterprise, told Stuart Smith of specialist web site SEIS.co.uk: “Many businesses who want to enter these schemes can’t because they are family owned and shareholdings by family members are aggregated and typically fail this test.”
“The family self-funds the business anyway but cannot access the tax breaks that they could if they put their cash into another business unconnected with their family.”
Industry experts were hoping Chancellor George Osborne would raise SEIS investment limits for the current £100,000 to between £150,000 and £250,000 in his Autumn Statement mini-Budget, but he left SEIS rules unchanged.
Osborne did inform the House of Commons that HM Revenue & Customs (HMRC) is setting up a new online portal to manage SEIS and EIS companies and investments.
An online presence for Venture Capital Trusts (VCT) is also in the pipeline.
However, the move is more to do with HMRC managing tax avoidance rather than making SEIS and EIS investments easier.
The Chancellor told MPs that EIS and VCTs had been subject to a high level of tax abuse and needed closer monitoring.
The measure follows a number of high profile cases involving alleged tax avoidance by celebrities and sports stars.
In some cases, investors put aside millions of pounds in EIS and VCTs to fund films that were never produced. Instead, the project generated huge losses which were then offset against other income.
“The bottom line of all the research and talks we have had with owners and managers would like to see SEIS and EIS play a wider role in financing small businesses,” Moffatt told SEIS.co.uk
“Finding money to grow a business remains a major problem and although small businesses recognise and appreciate help is out there, they feel it needs joining up and funding made easier to access.
“Streamlining how to find the most suitable from the numerous funding schemes and incentives would be a great step forward.”
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