SEIS is a very exciting scheme, and, I believe, very likely to result in a significant increase of investment in new small businesses over the next couple of years. Most wealthy people spend a lot of time looking for ways to reduce their tax (Her Majesty does tax income pretty aggressively wherever She can find it), so SEIS will no doubt be flagged up to them if they have a half-way competent tax advisor.
There are, however, many people who do spend rather too much time trying to reduce their tax burden. Whether Jimmy Carr was really as clueless about his tax avoidance scheme as he purported to be is irrelevant: the fact is, some people do engage in the full-contact sport of exploiting loopholes in tax law to reduce their tax, ideally to nothing.
What does this have to do with SEIS? Well, HMRC has been very careful, in drafting the SEIS regulation, to leave nowhere for such people to hide. The finance bill legislation makes 8 separate references to tax avoidance, like:
257BE The no tax avoidance requirement
The relevant shares must be subscribed for by the investor for genuine commercial reasons, and not as part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax.
In fact, if you think about it, most of the clauses in the legislation are to do with preventing the scheme from being used for tax avoidance. All the little gotchas which might catch out an unwary entrepreneur are, in fact, there to stop the scheme from turning into a tax avoidance scheme.
A thumb rule
So, here’s a good thumb rule for deciding whether what you’re thinking of doing will disqualify you:
If it sounds clever, it probably will disqualify you.
Here’s an example. Most entrepreneurs are connected to other entrepreneurs. Some are wealthy enough to invest as well as start up companies. A perfectly reasonable line of thinking might be to come to a mutually beneficial investment, such as:
“I’ll invest in your startup, you invest in my startup, that way we’re sharing the risk betwen our startups, we have connected our two ventures together nicely, and as a bonus we both get some SEIS relief. How clever!”
This is indeed really clever, and will earn both investors an immediate disqualification from SEIS relief, due to the “No related investment” requirement, affectionately known as 257BC:
The investor (“P”) must not subscribe for the relevant shares as part of an arrangement which provides for another person to subscribe for shares in another company in which P, or any other individual who is party to the arrangement, has a substantial interest.
So, at any point where you start to get that tingling feeling that says you’ve found a clever way to get some more money out of SEIS than the straightforward 78% of Income and Capital Gains tax relief that the scheme offers to a genuine, “at arms’ length” investor in your company, you’ve probably found a trick that will disqualify you.
78% is a massive discount in risk for investors. Don’t try and be clever and squeeze out more, or you may be left with no SEIS relief at all.