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FA 2012 analysis
Venture capital reliefs
SPEED READ FA 2012 Schs 6, 7 and 8 contain a number
of significant changes in relation to venture capital
reliefs. Schedule 6 introduces a new scheme, the
seed enterprise investment scheme (SEIS), which is
designed to encourage individuals to invest in small,
start-up trading companies. The changes in Schedules
7 and 8 aim to extend, simplify and better focus the
enterprise incentive scheme (EIS) and venture capital
trusts (VCTs). The biggest hurdle at present is the
uncertainty that surrounds the new ‘disqualifying
arrangements’ condition.
Christine Yuill is a Senior Associate with Pinsent
Masons LLP's tax team. She specialises in corporate
and business tax and advises on the tax aspects of
mergers and acquisitions, joint venture arrangements,
and reorganisations. She has a particular interest
in venture capital reliefs. Email: christine.yuill@
pinsentmasons.com; tel: 0141 567 8530.
The new SEIS relief
SEIS is a new tax-advantaged venture capital scheme
that offers investors enhanced income tax and CGT
reliefs. The policy objective of introducing SEIS
is to support the government’s growth agenda by
‘helping smaller, riskier, early stage UK companies,
which may face barriers in raising external finance,
to attract investment’. The original idea in July 2011
had been for a much broader business angel seed
investment scheme, but SEIS is a much watereddown
version and operates in a similar fashion to
EIS, albeit with more favourable reliefs.
Enhanced tax reliefs: Tax reliefs are available to
individual investors who subscribe for shares in
SEIS qualifying companies on or after 6 April
2012.
The qualifying conditions of SEIS are
similar to, but more restrictive than, the
EIS qualifying conditions
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SEIS investors can claim upfront income tax relief
of 50% of the amount subscribed, up to an annual
investment limit of £100,000, provided that the
shares are held for three years. In addition, there are a
number of CGT reliefs available to SEIS investors:
an exemption from CGT on disposal of the
shares, provided the shares have been held for
three years;
relief for allowable losses on disposal of the
shares (less any income tax relief already
claimed); and
an exemption from CGT on gains realised from
asset disposal in tax year 2012/2013, provided
that the gains are re-invested in a qualifying
SEIS investment in the same year. The £100,000
investment limit that applies to income tax also
applies for CGT re-investment relief.
Examples 1 and 2 set out how the reliefs apply.
Qualifying conditions: The qualifying conditions
are similar to, but more restrictive than, the EIS
qualifying conditions. As with EIS investments,
there are conditions that apply to both the investor
and the investee company. The table summarises
the SEIS qualifying conditions and provides a
comparison to the EIS qualifying conditions.
The most noteworthy qualifying conditions,
when compared to EIS are:
the investment limits of £100,000 per
annum per investor and £150,000 total SEIS
investment per company;
the employee limit of 25 full-time (or parttime
equivalents);
the gross asset limit of £200,000 immediately
before the SEIS share issue; and
the fact that a trade is only SEIS qualifying if
it commenced less than two years before the
share issue date.
Compliance: The compliance procedure is
similar to EIS. A company can apply to HMRC’s
Small Company Enterprise Centre for advance
assurance that it is SEIS qualifying (HMRC has
produced a pro-forma advance clearance form
for companies to use for both EIS and SEIS
applications).
The advance assurance procedure has proved
vital in assisting EIS qualifying companies
to attract investors and it is expected that the
procedure will prove equally important to
companies seeking SEIS investment. Once the
investment has been made, the company can then
apply for a formal compliance statement. This may
only be done once 70% of the money raised has
been spent. SEIS investors must claim their income
tax relief no later than the fifth anniversary of the
filing date for the relevant tax year.
Points to watch: SEIS provides very favourable
tax reliefs for investors. However, it is worth
noting the following potential hurdles and pitfalls
when seeking to ensure that your client, whether
investor or investee, benefits from the scheme:
SEIS is not available if there has been previous
EIS or VCT investment in the company;
a company can only apply for a compliance
certificate once at least 70% of the SEIS monies
raised by the company has been spent. This
could delay the ability of SEIS investors to be
able to claim their upfront tax relief;
CGT re-investment relief is only available
for assets disposed of in 2012/13 and gains
re-invested in SEIS qualifying companies in
the same year. This may prove difficult in the
current economic climate; and
the current uncertainty in relation to the new
‘disqualifying arrangements’ condition (see
the commentary under ‘points to watch’ for
the EIS/VCT changes below).
It is also worth noting a couple of planning tips
when advising your clients in relation to SEIS:
unlike other CGT reliefs (including EIS
deferral relief), in order to benefit from SEIS
www.taxjournal.com ~ 7 September 2012

CGT re-investment relief, only the gain (and
not the full proceeds) needs to be reinvested;
and
EIS/VCT monies can be raised following
the SEIS investment. However, EIS/VCT
investment can be raised only once at least
70% of the SEIS monies raised by the company
has been spent.
EIS and VCT changes
FA 2012 makes a number of changes aimed
at extending, simplifying and better focusing
venture capital reliefs. While the vast majority
of the changes are favourable and have been
welcomed by the venture capital industry, the
same cannot be said of the new ‘disqualifying
arrangements’ condition which is discussed in
more detail below.
Increased limits and relaxation of conditions:
Most of the changes result either in more
companies falling within the EIS and/or VCT
regime or in greater flexibility in the qualifying
investments that can be made. The following
changes apply to EIS and VCT investments on or
after 6 April 2012:
the annual EIS investment limit for individuals
is doubled from £500,000 to £1m;
the minimum EIS subscription of £500 is
removed;
the gross assets test is increased from £7m
immediately before the EIS/VCT share
issue and £8m immediately after to £15m
immediately before and £16m immediately
after;
the employee limit is increased from 50 fulltime
employees (or part-time equivalent)
to 250 full-time employees (or part-time
equivalent);
the annual amount that can be invested
in a company through EIS, SEIS or VCT
is increased from £2m to £5m. It had been
proposed in the draft legislation published
in December 2011 that the limit would be
increased to £10m. However, disappointingly,
state aid was only granted in respect of an
increase to £5m;
EIS investment can be made in shares that
carry certain preferential rights to dividends;
and
an EIS investor is no longer treated as holding
a material interest in a company if he holds
loan capital in the company.
Feed-in tariff trades no longer qualifying: The
2011 Budget announced that companies whose
activities consist wholly or to a substantial
extent of the subsidised generation or export
of electricity (other than hydroelectric power)
would cease to be EIS/VCT qualifying with effect
from 6 April 2012. Finance Act 2012 makes this
change, however, there are a couple of notable
exceptions:
where the generation or export is carried on by
a community interest company, a co-operative
7 September 2012 ~ www.taxjournal.com
Example 1
John sells an asset in August 2012 for £250,000, realising a chargeable
gain of £100,000 (before exemption). Rather than paying CGT on the
gain, he decides to re-invest the gain by making a qualifying SEIS
investment. John subscribes £100,000 for SEIS shares which he disposes
of for £150,000 in August 2016.
As John has re-invested the whole of his gain and it does not exceed
the annual limit of £100,000, the £100,000 gain in 2012/13 is free from
CGT. John receives income tax relief of £50,000 in 2012/2013 and when
he disposes of his shares in 2016/17, the £50,000 gain is CGT exempt.
Example 2
Rather than investing the full £100,000 gain, John re-invests £80,000 for
SEIS shares. He sells the shares in August 2016 for £20,000.
£80,000 of John’s 2012/13 gain is CGT exempt and the remaining
£20,000 is subject to CGT (subject to any other reliefs or exemptions). He
receives income tax relief in 2012/13 of £40,000. In 2016/17, he recognises
a capital loss of £20,000 (loss of £60,000 less income tax relief of £40,000).
Unlike other CGT reliefs (including EIS
deferral relief), in order to benefit from
SEIS CGT re-investment relief, only the
gain (and not the full proceeds) needs to
be reinvested
society or a community benefit society; and
where the plant used to generate the
electricity relies wholly or mainly on
anaerobic digestion.
New ‘disqualifying arrangements’ condition:
The new condition applies to all EIS, SEIS
and VCT shares issued on or after 6 April
2012, regardless of whether the ‘disqualifying
arrangements’ occurred before or after that date.
Despite the fact that the legislation relating to
all three reliefs contains separate anti-avoidance
provisions, the condition is an anti-avoidance
test aimed at ensuring that companies are not
set up for the purpose of accessing the venture
capital reliefs.
Arrangements are ‘disqualifying arrangements’ if:
the main, or one of the main purposes, of the
arrangements is to secure that the investee
company carries on a ‘qualifying’ activity and
that shares issued by it qualify for EIS/SEIS/VCT
relief; and either:
an amount representing all or the majority of
the money raised under the EIS/SEIS/VCT
subscription is, in the course of the arrangements,
paid to or for the benefit of a person who is party
to (or a connected person); or
in the absence of the arrangements, it would be
reasonable to expect that the greater part of the
investee company’s qualifying business activities
would have been carried on by a person who is
For related
reading, visit
www.taxjournal.com:
Comment:
Comparing the EIS
and SEIS (Annette
Morley, 9.2.12)
The new seed
enterprise
investment scheme
(Clara Snow & Erika
Jupe, 19.1.12)
News: New EIS and
VCT limits receive
state aid approval
(Andrew Goodall,
7.6.12)
Practical issues
on EIS and VCT
investment (Erika
Jupe, 26.5.11)
17

party to the arrangements (or a connected
person) as part of another business.
This language is very broad and, on the face of it,
it appears that many investments which are not
carried out for tax avoidance reasons would be
caught. There is no definition of ‘arrangement’
so not only is it difficult to work out what
constitutes an arrangement but additionally, as
a result, to work out what person or persons are
party to such arrangements.
The biggest hurdle at present is the
uncertainty that surrounds the new
‘disqualifying arrangements’ condition
Points to watch: The changes to EIS and VCT
in FA 2012 result in increased opportunities for
both investors and companies seeking venture
capital funding.
The increased company and individual
investment limits mean that companies can
seek further EIS/VCT investment, even if
they had reached the previous maximum
of £2m, and that investors can reduce their
income tax bill by up to £300,000 per annum
rather than the previous maximum reduction
of £150,000.
The significant increase in the gross assets
and number of employees conditions mean
that many companies, which were not
previously EIS and VCT qualifying, are now
qualifying.
There are, however, a couple of potential pitfalls
and hurdles in relation to the changes:
The biggest hurdle at present is the
uncertainty that surrounds the new
‘disqualifying arrangements’ condition.
HMRC's draft guidance states that no
advance assurance will be given in relation to
this condition and it will only be tested once a
formal application for relief is made, ie, once
the shares have been issued. This uncertainty
could prove a significant barrier to companies
seeking venture capital investment. The
guidance is draft at present and it is hoped
that by the time it is finalised, HMRC will be
willing to grant advance assurance which is
not qualified by this condition; and
While EIS investment can now be made in
respect of shares carrying preferential rights
to dividends, the amount and date of the
dividend payments must not be dependant
on a decision of the company (or any
other person), and dividends must not be
cumulative.
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www.taxjournal.com ~ 7 September 2012

Comparing the SEIS with the revised EIS
SEIS
EIS
Reliefs
Investor limit £100,000 p.a. £1m p.a.
Income tax relief 50% 30%
CGT on asset sold re-invested Exempt in 2012/13 only. Deferred up to 28%.
Minimum holding period Three years. Three years.
Qualifying conditions for the investor
Anti-avoidance
No related arrangements
No substantial interest (investor and
associates)
Employees/director
Subscription for genuine commercial
reasons, not for tax avoidance.
No related investment arrangements.
No more than 30% of:
ordinary share capital;
issued share capital;
voting rights; or
rights to assets in a winding up.
Investor cannot be an employee.
Investor can be a paid or unpaid director.
Subscription for genuine commercial
reasons, not for tax avoidance.
No more than 30% of:
ordinary share capital;
issued share capital;
voting rights; or
rights to assets in a winding up.
Investor cannot be an employee
or director except where investor
subsequently becomes a paid director.
Qualifying conditions for the company
Gross assets £200,000 before shares issued. £15m before EIS shares issued and £16m
after.
Investee company unquoted
Qualifying trade
Independence and control
No risk capital investment
Purpose of share issue
Unquoted when shares issued. No
arrangements to become quoted.
Must exist wholly for the purpose of
carrying on a qualifying trade. Trade
must have commenced less than two
years before shares issued.
Must not be a 51% subsidiary of another
company or under the control of another
company.
Subsidiaries must be 51% subsidiaries.
No previous EIS or VCT investment.
To raise money for qualifying business
activity carried on by company or a 90%
subsidiary.
Unquoted when shares are issued. No
arrangements to become quoted.
Must exist wholly for the purpose of
carrying on a qualifying trade.
Must not be a 51% subsidiary of another
company or under the control of another
company.
Subsidiaries must be 51% subsidiaries.
To raise money for qualifying business
authority carried on by company or a
90% subsidiary.
When money raised must be used Within three years of share issue. Within two years of share issue.
UK permanent establishment UK permanent establishment. UK permanent establishment.
No pre-arranged exits
Number of employees (or part-time
equivalent)
No arrangements for cessation of trade
or disposal of assets by the company.
Fewer than 25. Fewer than 250.
No arrangements for cessation of trade
or disposal of assets by the company.
Investment limit No more than £150,000 under SEIS. No more than £5m under EIS, SEIS or
VCT.
Company not in difficulties
No disqualifying arrangements
No partnerships
Not in ‘financial difficulties’ when shares
issued.
No disqualifying arrangements in place
when shares issued.
Not a member of a partnership.
Not be in ‘financial difficulties’ when
shares are issued.
No disqualifying arrangements in place
when shares issued.
7 September 2012 ~ www.taxjournal.com
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