A common question we're asked is whether directors can invest in their own companies and claim S-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 of the company 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:
You are not allowed to invest in a company as an employee of the company, though you can invest as a director.
You will be considered a director if:
- You occupy the position of director, by whatever name called, or are a person in accordance with whose directions or instructions the directors are accustomed to act. OR
- You are a manager of the company or otherwise concerned in the management of the company’s trade or business, AND
you either, directly or indirectly control not less than 20% of the ordinary share capital of the company.
You can become a director before or after the investment and still qualify as long as this is before being paid remuneration. You may receive the 50% tax relief benefit of the SEIS scheme as a director even if you receive (reasonable) remuneration.
EIS Rules for Directors:
Unpaid directors may claim EIS tax relief if they are not connected to the company before they make their investment. This means you can only become an unpaid director if you are appointed after the investment is made, leaving you eligible for EIS!
Paid directors must meet ‘business angel’ requirements in order to become EIS-eligible. For the purposes of EIS, business angels are those investors who become directors and receive or, are entitled to receive, remuneration. However, they must only become directors after they make their first investment & those shares are issued. In short, an investor should subscribe and receive the shares, then 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!