Technical Briefings
05 October 2011
How can a small trading company attract inward investment?
One of the difficulties facing many small businesses, particularly in the current economic climate, is how to raise finance. One option which may be available to these companies is to seek private investment but how can a small company ensure that they are attractive to potential investors? This article explores a possible answer to this important question.
Any small trading company meeting certain conditions can offer shares to investors which may qualify for the tax advantages available under Enterprise Investment Scheme (“EIS”) rules. This can make an investment in a small owner-managed company attractive to an individual investor who might not otherwise have considered the proposition due to the risk inherent in many small companies.
The main conditions which a company must meet in order to be a ‘qualifying company’ are as follows:
- It must be an unquoted company.
- It must be a company carrying on a qualifying trade.
- The money raised must be used in an existing trade, or in preparing to carry on a trade, or in research and development where it is intended to lead to a qualifying trade being carried on.
- The money raised must be used within two years of the shares being issued to the investor(s) or within two years of the trade commencing if that is later.
Most trades are ‘qualifying’ trades, but there are a few activities which are deemed to be excluded for EIS purposes such as property development, and your Wilkins Kennedy advisor can clarify whether or not your particular company should be eligible for an Enterprise Investment Scheme.
One of the attractions to potential investors seeking to invest in an EIS eligible company is that it is possible for that company to seek formal advance assurance from HMRC that the company should qualify for the scheme, and again Wilkins Kennedy would be happy to assist in securing any such assurance.
In approaching potential investors, it is important for business owners to understand why their offer might be attractive.
The headline tax reliefs for eligible investors are:
- Income tax relief at 30% of the investment (increased from 20% from 6 April 2011). For example, a qualifying investor paying £10,000 for shares would have a reduction in their personal income tax liability of £3,000.
- No capital gains tax to pay on any eventual gain made on the disposal of the qulaiyfing shares in the company by the investor.
- The ability to defer capital gains tax arising on disposals of unrelated chargeable assets sold within 3 years prior to or 12 months following investment in an Enterprise Investment Scheme.
- Generous loss relief provisions if the investment is ultimately unsuccessful.
It should be noted however that the specific rules relating to Enterprise Investment Schemes are detailed and complex and advice should always be sought if you are considering eligibility for the scheme as either a company seeking investment or as an investor. Your local Wilkins Kennedy advisor would be happy to assist you in this area.