With bank finance still exceptionally hard to secure, two of the most common queries we are hearing at the moment are how to raise finance and how to make investing in your own business tax efficient. One area that deserves more attention is the tax incentives available to investors. Until recently, it was very difficult for a company to qualify under the various schemes available.
In order to encourage investment in new businesses, the government introduced new rules in the 2011 Budget. These new rules and criteria came into effect on the 25th November 2011, greatly expanding the number of companies who can qualify. Here we take a look at the two main schemes available:
-Employment and Investment Incentive Scheme
-SEED Capital Scheme
-Employment and Investment Incentive Scheme (EIIS)
The Employment and Investment Incentive Scheme allows an investor to claim a tax refund on amounts they invest in ‘qualifying’ companies. The term qualifying is key as it has been greatly expanded recently and now covers a large swathe of unquoted companies. There are several notable exceptions however. For example professional services companies or hotels would not qualify under the scheme.
In return for their investment, the investor will receive tax relief of 30%. This is capped at a maximum of €150,000 per year however a further 11% of a tax refund can be claimed at the end of three years if the company has either increased its workforce or increased its spending on Research and Development.
In general anyone with more than 30% shareholding in a company cannot claim tax relief on an investment in that company. This restriction does not apply where the total value of shares issued by the company does not exceed €500,000. The main drawback in relation to the EIIS is that relief can only be claimed where the individual has other taxable income.
If you are trying to source finance for your company from private investors, being fully up to speed on the EIIS scheme will be of great benefit to you.
SEED Capital scheme
In the majority of cases new business owners setting up will have no or very little taxable income for the first few years of the business. If you are about to invest money in your new business and you have worked as a PAYE worker in any of the last 6 years, looking at the SEED capital relief scheme may be very beneficial.
This relief allows an individual to claim a tax refund on their investment in a start up company against their income tax liability from any of the previous six years subject to a maximum of €100,000 per year. The general rules in relation to the activities that don’t qualify under the Employment Incentive scheme also apply to the SEED scheme. In addition the following conditions must be satisfied:
-Investor must have been a PAYE employee prior to setting up company (e.g. sole traders would not qualify)
-Investor must hold at least 15% of the issued share capital of the company
-Investor must become an employee of the company within six months of the investment.
Whether you are looking to secure funding from an external investor or you are about to invest funds in your own business, investigating the recently revamped tax incentive schemes is crucial.
Post by Roy Finucane, www.taxassist.ie