Our tax preparation specialists explain this form of investment scheme
At DSR Tax Refunds Ltd, we know that venture capital schemes can get really complicated. That’s why our experts want to help make life as easy as possible for you by sharing our specialist knowledge with you. So, whether you are wanting more information about VAT or need to know about charitable tax relief, our handy guides are here to help. All our information is based on HMRC sources, so you can rest assured that these guides are filled with helpful and accurate information.
What are the different types of Venture Capital Schemes?
Venture capital schemes are types of investment, usually in newer, smaller trading companies. These schemes provide tax relief to those individuals who invest in them. This allows investors to help these small companies, which are often higher risk investments or social enterprises, to grow and develop. The tax reliefs may apply to direct and indirect investors in these new, small companies.
The venture capital schemes allowed by HMRC are as follows:
- Enterprise Investment Schemes (EIS) which encourage direct investment by individuals.
- Seed Enterprise Investment Schemes (SEIS) which encourage direct investment in certain types of early stage small companies.
- Venture Capital Trusts (VCT) which encourage indirect investment by individuals through a VCT, which is a type of investment which is similar to a trust. The VCT makes a range of investments in companies.
- Social Investment Tax Relief (SITR) provides tax reliefs for investments in social enterprises. This scheme was enlarged on 6th April 2017 for newer social enterprises.
- Share Loss Relief (SLR), previously known as VC Loss Relief, which is available to individuals and investment companies on the disposal of shares in certain types of company.
Venture capital schemes have been around in various forms since the early 1980s. Their purpose is to encourage investment in small private trading companies through the use of tax reliefs.
HMRC have a specialist team dealing with tax-advantaged venture capital schemes, called the Venture Capital Relief team. The VCR team grants approval of schemes as VCTs. If you have any queries about whether your investment scheme will meet the requirements of the above-mentioned venture capital schemes, you will need to contact this specialist team on 0300 123 3440.
The VCR team doesn’t actually deal with any claims for tax relief from investors – these would be dealt with by the investor’s usual tax office.
Enterprise Investment Schemes (EIS)
The Enterprise Investment Scheme (EIS) is intended to help small, higher-risk trading companies to attract investment and raise finance by offering tax reliefs to investors who purchase shares in these companies.
There are certain rules that the company has to observe at the time of investment and for at least 3 years following the investment. If they fail to do so, tax relief will not be allowed and will be withdrawn if already given. Investors need to be aware that this is the case and they may not be entitled to tax relief if the company fails to observe these rules. Additionally, there are certain conditions that the investor needs to meet before they are eligible for any tax reliefs.
EIS Income Tax Relief
The HMRC rule is that an individual is eligible for income tax relief if they subscribe (pay) in cash for full-risk ordinary shares in an EIS-qualifying company. In order to be eligible, the investor must meet the following conditions:
- They must have no connection with the issuing company
- They must not have received a loan which would not have been made were it not for the EIS investment
- They must have obtained the shares for a genuine commercial purpose and not purely for the reasons of tax avoidance
The tax relief reduces the individual’s Income Tax liability up to a set limit, which is currently set at £1,000,000 for the current tax year (2019/20).
In addition to the EIS Income Tax Relief, the investor may also be entitled to Capital Gains Tax exemption, share loss relief or Capital Gains Tax deferral relief.
Seed Enterprise Investment Schemes (SEIS)
Seed Enterprise Investment Schemes (SEIS) are intended to help small, early-stage companies raise finance by offering tax reliefs to investors who purchase new shares in these companies. It complements the EIS which offers tax reliefs for investors in higher-risk companies. SEIS is intended to ease the difficulties faced by very early-stage companies by offering higher rates of tax relief to investors than those investing in EIS companies.
SEIS Income Tax Relief
As with EIS, the investor needs to meet certain conditions to be eligible for tax relief. The investor must have a UK income tax liability to offset against the relief although they don’t need to be a UK resident. They must hold the shares for at least 3 years from their date of issue to retain the tax relief. The amount of tax relief is equal to a reduction in the investor’s income tax liability at the SEIS rate of 50%.
The SEIS rules are written in such a way to explicitly state that these schemes are not to be used to tax avoidance purposes. This means that the shares must be issued for actual commercial purposes and not for the purpose of allowing the investor to avoid their tax responsibilities.
Venture Capital Trusts (VCT)
Venture Capital Trusts (VCT) are companies which are similar to an investment trust. These have been approved by HMRC and can either subscribe shares or lend money to small unquoted companies. As a result, both VCTs and their investors are entitled to a number of tax reliefs. These are designed to encourage investment in small, unquoted companies.
The tax advantages of VCTs are as follows:
- The VCT is exempt from Corporation Tax on chargeable gains (however, losses for chargeable gains aren’t allowable losses).
- Individual investors are entitled to claim ‘front-end’ income tax relief on share subscriptions of up to £200,000.
- Individual investors are exempt from Capital Gains Tax on the disposal of ordinary shares up to the permitted threshold of £200,000.
- Individual investors are exempt from income tax on any dividends they receive from ordinary shares in the VCT up to the permitted threshold of £200,000.
To claim ‘front-end’ income tax relief, investors need to submit claims to their own HMRC office, either through a Self Assessment tax return or separately in writing.
Share Loss Relief (SLR)
Share Loss Relief (SLR) was formerly known as VC Loss Relief and allows any capital losses arising from shares to be set against an individual’s income as long as certain conditions are met. Allowing losses to be set against income, rather than just chargeable gains, could be considered more valuable to some investors and therefore encourage them to invest in unquoted trading companies. SLR is available to individual investors (set against income tax) and companies (set against Corporation Tax) but only investment companies can claim.
For individual investors, amounts which qualify for SLR are deducted from net income either for the year the loss was made in, the previous year or both years if necessary. The claim for SLR must specify which year the relief is being claimed for.
For companies, SLR is firstly deducted when calculating income for Corporation Tax purposes in the accounting period in which the loss arose and then any unused relief may be deducted from the accounting period which fell wholly or partially within the 12 months immediately prior to the loss. It must be used in the year of the actual loss before it can be offset against the previous year.
Social Incentive Tax Relief (SITR)
Social Incentive Tax Relief (SITR) is a form of government tax relief which is intended to encourage investment in social enterprises and provide such enterprises to access finance. Investors can deduct 30% of the cost of their investment from their income tax liability, either in the tax year in which the investment was made or the previous tax year. However, the investment must be kept for at least 3 years to retain eligibility for the relief. Investors can also invest any chargeable gains in a qualifying social investment in order to defer Capital Gains Tax, only paying CGT when the social investment is sold or redeemed.
The investment, and organisation behind the social enterprise, must meet certain criteria to be eligible for SITR. Organisations must have a clearly defined social purpose. Social enterprises need to apply to HMRC to confirm that they and their investment meet the scheme conditions and investors are only able to claim tax relief once this confirmation has been received.
How can DSR Tax Refunds Ltd help?
We know that deciding whether to invest in a Venture Capital Scheme can be pretty tough – there’s so much to consider and that’s before you start thinking about the tax implications. Our friendly team of tax specialists at DSR Tax Refunds Ltd are on hand to help make life easier for you. We’re the experts at identifying your maximum allowable expenses so call us on 0330 122 9972 – we’re the tax experts you can trust.