Rules for Directors who want to invest in their own Company and benefit from SEIS or EIS.
A common question we're asked is whether directors can invest in their own companies and claim SEIS/EIS. Directors tend to fall into two camps: those who founded the company and those who have joined as executives. If the director satisfies the conditions listed below then they should be eligible to invest and benefit from the S-EIS Tax Relief Scheme!
An investor must not have any ‘substantial interest’ in the issuing company at any time from incorporation until the third anniversary of the date of the share issue (or for EIS two years before the date on which the shares are issued if that is later). For SEIS and EIS, ‘substantial interest’ is defined as the investor directly or indirectly possessing or having an entitlement to acquire more than 30% stake in the company. Shareholdings of associates are taken into account in arriving at the 30% figure.
SEIS Rules for Directors:
Employees are unable to benefit from S-EIS - though you can invest as a director.
You'll be considered a Director if you occupy the position of director by whatever name called and any person in accordance with whose directions or instructions the directors are accustomed to act.
It also includes any person who:
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is a manager of the company or otherwise concerned in the management of the company’s trade or business, and
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is either on their own or with one or more of their associates the beneficial owner of, or able, directly or through the medium of other companies, or by any other indirect means, to control not less than 20% of the ordinary share capital of the company.
EIS Rules for Directors:
In order to qualify for EIS relief, the investor cannot be connected with the company at any time in Period A (VCM10540).
Directors can qualify if they are unpaid (with no entitlement to be paid).
Paid directors are able to benefit from EIS if they meet the Business Angel requirements. They must be appointed as director after their investment and be entitled to receive remuneration.
HMRC's guidelines state it applies only where:
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at the time when the shares are issued, the director has never before been connected with the company in any way, or been involved in carrying on any part of the trade now carried on by the company (or its subsidiary), whether as an owner of that trade or as a director or employee of the owner, or
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the issue of shares is made before the termination date (see VCM10540) of a previous issue of eligible shares in respect of which the director satisfied the condition just mentioned or
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the issue is made before the termination date of a previous issue of shares in respect of which the director was eligible for SEIS relief. (see VCM32010).
In short, for EIS an investor should invest > receive the shares > be appointed as director, and only then receive remuneration.
If you were a paid director at the time the shares were issued, this means you cannot receive a salary, only other non-remuneration income which may include reimbursement of expenses, interest on loans, dividends, or payment for goods and services.
As per VCM11070, ‘remuneration’ includes such items as benefits, and the remuneration must be reasonable in amount. The purpose of this qualification is to prevent de-risking of investment and therefore, tax avoidance. If a director is paid a gratuitously large sum and also qualifies for S-EIS, they get a double benefit that amounts to permitting tax avoidance. Therefore, a director’s remuneration must be “reasonable” according to what common sense dictates.
If you have any questions please hit the chat bubble in the corner to speak to a member of the team!