No minimum investment size for claiming SEIS relief
The First-Tier Tribunal has confirmed that shareholders in a company do not need to invest a minimum level of funds in order to qualify for seed enterprise investment scheme (SEIS) relief.
Oxbotica Limited v HMRC involved a start-up company – Oxbotica – founded to spin out software produced by the University of Oxford for the design of autonomous vehicles.
Oxbotica was incorporated in late September 2014, issuing 100,000 shares of £0.01 each to four individuals and the University, so raising a total of £1,000 of capital. In addition, the company secured a loan of £110,000 from the University.
In July 2015, Oxbotica applied to Her Majesty’s Revenue and Customs (HMRC) for authority to issue SEIS compliance certificates to three of the four individuals in relation to 31,600 of the original 100,000 shares, which represented a total equity investment of £316.
What is SEIS relief?
SEIS was introduced in 2012 to encourage investment in start-up companies. Similar to its “big sister”, enterprise investment scheme (EIS) relief, SEIS provides certain tax advantages to individuals:
- An individual subscribing for shares in a company can set 50% of the share subscription price off against his or her income tax bill (up to an annual limit of £100,000)
- A sale of those subscription shares is exempt from capital gains tax (CGT)
To qualify for SEIS, the individual must hold the shares for a minimum period of three years. The shares must be issued to raise money for the purpose of a “qualifying activity”.
The shares must also be issued for “genuine commercial reasons”. Relief is not available if the main purpose, or one of the main purposes, of issuing the shares is to avoid tax (such as CGT).
Unlike under the EIS relief regime, there is no statutory minimum amount that an individual must invest to qualify for SEIS relief.
HMRC refused to give authority. It said that, although there is no minimum investment figure to trigger SEIS relief, it “would expect it to be more than the cost of the share issue, otherwise the funds cannot be said to have been raised for the purposes of … business activity”. HMRC went on to say that it was not prepared to grant relief because the mere £316 raised was not “of meaningful use” to Oxbotica.
There was then a series of correspondence, through which Oxbotica’s lawyers provided considerable information to HMRC in response to its enquiries, and in which they noted to HMRC that there is no statutory minimum investment to qualify for SEIS relief.
However, ultimately HMRC confirmed its refusal to give authority, stating that the amount raised was too small and, given that Oxbotica had already secured funding from the University, the purpose of the share issue had been to secure relief from CGT, rather than to raise money for Oxbotica’s business.
Oxbotica appealed to the Tribunal. In essence, it argued that the size of an investment is not relevant to its purpose. As the SEIS regime does not set out a statutory minimum investment, an investment cannot be denied relief merely because it is small.
What did the Tribunal say?
The Tribunal agreed with Oxbotica. It noted that the SEIS relief legislation was “highly prescriptive” and imposed no minimum investment threshold. It also noted that the legislation contained a specific anti-avoidance provision (see box above). The judge was not therefore prepared to interpret the statute to introduce HMRC’s proposed requirement for a “meaningful level of investment”.
The judge also said that there was no need for the company applying under the SEIS regime to show that a share issue is its only means of funding. It was therefore perfectly acceptable for Oxbotica to apply for relief, even though it had secured substantial funding from the University.
HMRC was therefore not prevented from granting authority to Oxbotica to issue SEIS certificates.
Although still a relatively new relief, SEIS can be extremely useful for budding, start-up businesses and is becoming increasingly significant in today’s tech society in connection with seed financing by entrepreneurs and founder investors.
The Tribunal’s decision in this case confirms that, whilst notably prescriptive, SEIS nonetheless remains a flexible relief which caters for minimal capital investments as well as more substantial ones.
It is important to remember the core issue in this decision: the size of an investment will not of itself dictate its purpose, including whether the share issue has a tax-avoidance purpose.
However, the situation in other cases may be different. Where shares are plainly issued for a purpose other than to fund a qualifying business, relief is unlikely to be available. Likewise, if a company issues shares for the purpose of avoiding tax (whether the sole purpose or one of several), there will be no relief. This will always depend on the specific circumstances in each case.