Come and get us, angels

By Philip Wilkinson on May 23rd, 2012

It’s an exciting time for companies raising early-stage funding, as the year ahead looks rosier than it has been for many years, at least in the UK. Not only that, but it’s a great time to be an angel investor, too, as it becomes easier to connect with great entrepreneurs and the government introduces tax breaks, most notably the Seed Enterprise Investment Scheme (SEIS).

Launched in April this year, the SEIS allows any investor to put up to £100,000 a year into a series of small businesses and start-ups. For this, the companies must have been founded fewer than two years ago, have no more than 25 employees and less than £200,000 in assets, allowing the investor to claim 50 per cent as a tax credit for their income tax bill that year.

This is a huge benefit to investors. Imagine that you were about to pay a £30,000 tax bill one year. Were you to invest £60,000 in a start-up, you would offset that entire amount of tax and leave you with £60,000 of shares in a promising young company (which has really only cost you £30,000 overall).

In addition, you’ll be exempt from any capital gains from the investment if you re-invest any returns back into the business.

As usual, there are a couple of conditions attached:

  • you cannot personally be employed by the company (although you can be a director)
  • you cannot have more than a 30 per cent shareholding in it
  • you cannot have anyone associated with you who works for the company. This is a loose definition, but appears to include your aunt and your in-laws.

If you don’t meet any of those conditions, you would be ineligible from investing through the SEIS scheme. From the company perspective, you can raise up to £150,000 through the scheme and qualifying investors will be able to take part. Remember that investors have to invest as individuals and not through a company or investment vehicle.

Now here’s where it gets a little bit hazy. Imagine you are raising £200,000 and have three angel investors who want to invest £60,000 each, and one investment vehicle or fund that wants to put in £20,000 (yes, ok… it’s a very small fund!). It seems that you would need to issue £150,000 of shares amongst the three angel investors for £50,000, which you would ask them to use for SEIS purposes, and then issue them another £10,000 each, which would qualify for the Enterprise Investment Scheme instead. The £20,000 from the fund doesn’t qualify, and it would probably be best to get your accountants involved in the process.

To get the ball rolling, the company needs to submit an SEIS form on the HMRC website to prove that it’s a qualifying company. If approved, you’ll get a certificate and be sent claim forms to send to investors so they can claim their tax relief.

From the entrepreneur’s perspective, this is a great way to encourage people to take a risk on your company. Unfortunately it’s impossible to take part in investing in your own business in this way. You’ll probably be employed (or will be) by it and any money you wanted to put in would fall outside both SEIS and EIS. This leaves you with providing the company with a loan or a convertible note, but without any tax benefits.

For your individual shareholding, you will at least get Entrepreneurs’ Relief (up to a lifetime limit of £10 million and capital gains reduced to 10 per cent).

Of course, being able to invest in your own company and get both SEIS relief on the investment and Entrepreneurs’ Relief on the gain would be ideal, but sadly it is not allowed. After all… why would the Government give entrepreneurs any more help than they need to?

The real question is why aren’t all of the thousands of angel investors out there looking for start-ups to offset their tax bills? One reason could be that no one has marketed or pushed the SEIS scheme – it isn’t fully understood by everyone yet. However, a few of the early-stage funds I’ve spoken to says that it would revolutionise the investment space, as individual investors will bypass the funds to get access to the scheme.

So, spread the word: here we are, angel investors – a plethora of amazing young start-ups waiting to save you tax. Come and get us!