Tax incentives for investors in start-up companies are financially attractive, but the big question is can entrepreneurs claim the benefits by investing in their own companies?
As with many tax topics the answer is complicated. Yes, entrepreneurs can claim tax reliefs through the Seed Enterprise Investment Scheme (SEIS) in their own start-ups but only under specific circumstances.
These circumstances are dictated by the business relationships the founder or entrepreneur has with their company.
The tax question to answer is if the entrepreneur is ‘connected’ to the company.
How are investors connected to a SEIS company?
In general terms, of course they are, but connected has a precise meaning for SEIS.
A connected person is someone who:
- Controls 30% or more of the company’s share capital or voting rights
- Has the right to 30% or more of the company’s assets on winding up
- Is a partner, director or employee or is associated to someone who is
A connected person only has to tick one of the three boxes, so the list is either/or.
Another important point is a connected person is barred from the income tax relief under SEIS – so the 50% tax refund against the amount invested goes out of the window.
But capital gains tax relief on share growth is still available.
Who are your associates?
Control of shares and voting rights is complicated to track under SEIS rules. The point is not whether you have the control when you invest, but whether you have had shares or voting rights exceeding 30% for the two year’s before SEIS starts and the 36 months the scheme runs for.
And don’t forget that ‘associates’ count as well – they are business partners, trustees of any settlement where you are a settlor or beneficiary, spouses or civil partners, parents, grandparents, children and grandchildren.
A special rule for SEIS excludes directors as employees, so they are not connected unless they control 30% of the shares and voting rights or are entitles to a similar share of any corporate assets on winding up.
HM Revenue and Customs monitors SEIS investor qualification and is known to ask for service contracts between directors and start-up companies to scrutinise them to ensure the director does not control the company and any payments they receive from the company do not make them an employee.