Schemes to Help Small and Medium Sized Businesses Grow
There are schemes available for companies and social enterprises who issue new securities or shares in their company. These Venture Capital schemes are there to help small and medium sized businesses grow. Your company or social enterprise will need to have fewer than 500 employees and meet the trading requirements to qualify.
How Venture Capital Schemes Work
There are 4 schemes designed to help small or medium sized companies and social enterprises grow by attracting investment. They offer tax reliefs to individuals who buy and hold new shares, bonds or assets for a specific period of time. These schemes are sometimes known as tax advantaged venture capital schemes.
Who can apply
You may be able to apply if your company or social enterprise:
- has a permanent base in the UK
- carries out a trade that qualifies
- does not buy or sell its shares on a recognised stock exchange at the time of the investment
- meets the qualifying conditions of whichever scheme you opt for
- makes its first sale, product or service, within 7 years or 10 years for knowledge intensive companies
Trades that qualify
Most trades will qualify, including any research and development which will lead to a qualifying trade.
However, your company may not qualify if most of your trade includes things like:
- coal or steel production
- farming or market gardening
- leasing activities
- legal or financial services
- property development
- running a hotel
- running a nursing home
- generation of electricity, heat, gas or fuel
Limits on the Money You Raise
There’s no minimum, but there’s a maximum amount you can raise depending on which scheme you opt for. The maximum amount you can raise from all the schemes added together is:
£5 million in any 12 months
£12 million during the lifetime of your company
There may be higher limits if your company carries out research and development and innovation and meets certain conditions.
THE ENTERPRISE INVESTMENT SCHEME (EIS)
Your company may qualify if you’ve been trading for at least 4 months and have:
- no more than £15 million in gross assets
- fewer than 250 employees or 500 employees if you meet certain conditions
If your company’s under 10 years old, with less than £15 million of assets, you may be able to attract investment up to £5 million a year.
How the EIS Scheme works
EIS is designed so that your company can raise money to help grow your business. It does this by offering tax reliefs to individual investors who buy new shares in your company.
Under EIS, you can receive up to £5 million each year, and a maximum of £12 million in your company’s lifetime. This also includes amounts received from other venture capital schemes.
There are various rules you must follow so that your investors can claim and keep EIS tax reliefs relating to their shares.
Tax reliefs will be withheld or withdrawn from your investors if you don’t follow the rules for at least 3 years after the investment is made.
About the investment
The investment in your company must be a qualifying investment.
The shares you issue must be paid up in full when they’re issued and you’ll need to be registered at Companies House.
Your shares for this investment must be full risk ordinary shares which:
- aren’t redeemable
- carry no special rights to your assets or preferential rights to dividends
The shares you issue can have limited preferential rights but their dividend can’t be varied. They also mustn’t have a cumulative right to receive a dividend.
When you sell the shares there can’t be an arrangement to:
- protect the investment
- sell the shares at end of, or during the investment period
- structure your activities to let an investor benefit from a venture capital scheme
- a reciprocal agreement where you invest back in an investor’s company to also gain tax relief
THE SEED ENTERPRISE INVESTMENT SCHEME (SEIS)
Your company must be a new trade that’s been trading for less than 2 years and have:
– no more than £200,000 in gross assets
– fewer than 25 employees
But you won’t qualify if you’ve already had investment through EIS or a VCT.
If your company’s been trading for less than 2 years, with less than £200,000 of assets, you may be able to attract investment of up to £150,000.
How the SEIS Scheme works
SEIS is designed to help your company raise money when it’s starting to trade. It does this by offering tax reliefs to individual investors who buy new shares in your company.
You can receive a maximum of £150,000 through SEIS investments on which your investors can claim relief. This:
- includes any other de minimis state aid received in the 3 years up to and including the date of the investment – any excess won’t qualify for SEIS
- will also count towards any limits for later investments through other venture capital schemes
There are various rules you must follow so that your investors can claim and keep SEIS tax reliefs relating to their shares.
Tax reliefs will be withheld, or withdrawn, from your investors if you don’t follow the rules for at least 3 years after the investment is made.
About the investment
Your company must issue shares that meet requirements which are the same as those for shares issued under EIS.
The money you raise from the investment must be spent within 3 years from share issue. It must be spent on the qualifying business activity it was raised for. This includes:
- a qualifying trade
- preparing to carry out a qualifying trade
- research and development that’s expected to lead to a qualifying trade
You can’t use the investment to buy shares, other than in a qualifying 90% subsidiary which uses that money for a qualifying business activity.
SOCIAL INVESTMENT TAX RELIEF (SITR)
Your organisation must be a Social Enterprise like a:
- Registered Charity
- Community interest company
- Community benefit society
Your organisation may qualify if you have:
- No more than £15 million in gross assets
- Fewer than 500 employees
Social investment tax relief helps social enterprises raise finance by offering tax relief to individual investors.
How the SITR Scheme works
SITR is designed to help you raise money to support the trading activity of your social enterprise or charity. It does this by offering your investors tax relief on their investment if the qualifying conditions are met.
Tax reliefs will be withheld or withdrawn from your investors if you don’t follow the rules for at least 3 years after the investment is made.
You must have fewer than 500 full-time equivalent employees at the time the investment is made and can’t:
- be controlled by another company
- have more than £15 million in gross assets immediately before the investment is made
- be quoted on a recognised stock exchange
- be in a partnership
- control another company that isn’t a qualifying subsidiary
You can have subsidiaries but you must hold more than 50% of the ordinary share capital in each subsidiary.
About the investment
You must be raising money for a qualifying business activity and your investors must buy new shares. Any money they lend you as a debt investment must also be new.
The maximum amount of investment you can get through SITR is €344,827 (about £250,000) over 3 years, this:
- includes any other de minimis state aid received in the 3 years up to and including the date of the investment
- will also count towards any limits for later investments through other venture capital schemes.
You can’t guarantee your investors will get their money back before other shareholders or lenders, if your social enterprise fails.
Shares
Any shares you sell:
- must be new shares
- must be paid for in full, and in cash, at the time the investment is made
- mustn’t be preferential shares
Debt investment
The amount you’re lent:
- must be for a new debt investment or loan
- must be made in cash, in a single or several payments
- mustn’t be secured on any assets
Any interest you pay on the loan mustn’t be more than a reasonable commercial interest rate and the capital can’t be repaid during the qualifying period.
VENTURE CAPTITAL TRUST (VCT)
A Venture Capital Trust (VCT) is a company that’s authorised by HMRC. A VCT is a tax-based venture capital scheme designed to help smaller higher-risk trading companies to raise finance. The VCT may invest in your company if you have:
- no more than £15 million in gross assets
- fewer than 250 employees
