Investors Tax Reliefs – helping to get your business equity funded

As businesses navigate what has been described by the Prime Minister as a challenge analogous to an Alpine tunnel (and they try to reach the “sunlit pastures” at the end of the tunnel), a key issue is raising funding to help sustain those businesses.

As COVID-19 has changed our lives, it has also changed the business landscape in ways that the Government cannot have imagined at the time of delivering their Budget in March. To the Government’s credit, they have acted fast in introducing new measures to support business and self-employed people with schemes such as the Coronavirus Job Retention Scheme (CJRS), the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS) to mention a few.

The Government also have outlined the Coronavirus “Future Fund” scheme, which is launching this month. The Future Fund is intended to provide a potential source of funding for innovative, early stage, companies which rely on equity investment and are unable to access the CBILS (our previous blog Coronavirus Future Fund explores the details further).

A (not so) minor problem with the Future Fund?

There appears to be an obvious gap in the Future Fund. When early stage companies are seeking investment they often offer equity in the form of new shares, and will seek to agree with HMRC in advance that they qualify under the Enterprise Investment Scheme (“EIS”) and/or the Seed Enterprise Investment Scheme (“SEIS”) which attracts investors given the various generous tax reliefs provided by EIS/SEIS.

At the time of initial publication of this blog (5th May 2020) the initial term sheet for the Future Fund suggests that it will require convertible debt like funding and so may not be compatible with investment under EIS or SEIS, and may only in practice be compatible for investment via a Venture Capital Trust. Hopefully this will be rectified before the Future Fund goes live. There are plenty of “business angels” who can provide equity funding alongside the Future Fund and it seems like a missed opportunity to limit the Future Fund to VCT investment.

Introducing the BAD relief

On 11th March 2020 was the change to the relief formerly known as Entrepreneurs’ Relief, which is now called the Business Asset Disposal Relief (“BADR”).

The main actual change from the announcement was the lowering of the lifetime limit from £10million to £1million. Please see our previous blog on changes to Entrepreneurs’ Relief.

Using the reliefs in practice

But what do the changes in Business Asset Disposal Relief and the introduction of Coronavirus Future Fund mean in practice for investors and companies alike?

Businesses may now be considering what is the best long term funding solution as they seek to either re-establish their business models, or seek to trade out of what may be a U-Shaped recession. Some businesses may conclude that equity investment is the best route (rather than debt funding such as the CBILS or the BBLS). And as stated above, the Future Fund at the moment appears to be more “debt like” than “equity” in nature and so may not fit with EIS/SEIS.

But, it’s not all doom and gloom for investors. If a company doesn’t meet the EIS/SEIS criteria, there is also Investors’ Relief, which was introduced on 17 March 2016. This is quite similar to Business Asset Disposal Relief, but somewhat ironically is much more generous.

There are already a range of tax reliefs which are intended to encourage investment into what are typically SME businesses and which are summarised in the table below. The key aspect that businesses should be aware of is that the reliefs can actively encourage investment into the business and equity investment may be seen as a preferable route. This may be particularly so if debt funding from CBILS or the Future Fund aren’t technically compatible with the aims of the business.

And somewhat ironically, the tax reliefs for external investors are now actually (and potentially substantially) more generous than the tax reliefs for the persons who have originally set up and run the businesses. The owner managers who are now having to work out how to keep the businesses going.

Contact us

At MHA Tait Walker, we help investors and businesses alike to understand how to ensure that the likelihood of successfully raising investment is maximised.

For further information about the tax reliefs available for investors, please contact please contact Ryan Keltie or Alastair Wilson.

Summary table

× Must be an employee or officer
* Can qualify in limited circumstances

BADR Business Asset Disposal Relief
IR Investors Relief
EIS Enterprise Investment Scheme
SEIS Seed Enterprise Investment Scheme