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Tax Bite - Future Fund

The Government has announced further details of the Future Fund which opens today. It is disappointing news for companies and investors who were hoping that the matched investment could be through SEIS/EIS share subscriptions. It has been confirmed that the scheme will only apply to match convertible loans made by investors which of course means that SEIS/EIS share subscriptions will not qualify to be matched by the Government. This, and certain other conditions as set out below, mean that the scheme will be of limited use to smaller early stage start-ups which is very disappointing.

The Government is seeking to ensure that investors who make co-investments using the CLN as match funders under the Future Fund scheme, foregoing their EIS tax reliefs on the investment, will not jeopardise their eligibility for tax relief for previous EIS investments or for future EIS based investments. We are aware that some companies have SEIS/EIS investments lined up which they had been delaying in case the scheme would apply to SEIS/EIS investments.

Other key points to note:-

• There is a £250m pot available from the Government on a first come first served basis. Applications can be made from today.

• Companies must be UK-incorporated and if part of a corporate group, only the parent company is eligible.

• Companies must have previously raised at least £250k in equity investment from third party investors in the period from 1 April 2015 to 19 April 2020 (third party for this purpose does not include founders, employees, workers or consultants although not all of these terms are defined). This will in effect exclude smaller, newer start-ups.

• The company must have lined up at least £125k of matched third party convertible loan funding before making the application.

• The investor must come into one of the listed categories (which include certified sophisticated investors and certified high net worth individuals).

• The lead investor must make the application, rather than the company, although the company will have obligations to confirm its information and review the application.

• There are restrictions on what the convertible loan monies (from both the investors and the Government) can be used for. Amongst other things, the monies cannot be used to repay shareholder debt or to pay advisory or placement fees or bonuses to any corporate finance entity or investment bank or similar service provider on monies advanced by the Future Fund, or for 12 months pay bonuses or other discretionary payments to employees, consultants or directors other than those payments contracted before 20 May 2020.

• The terms of the convertible loans are broadly non-negotiable. They are for a maximum term of 36 months. There is an interest rate of at least 8% per annum, a conversion rate with a discount of at least 20% to the lowest price on a later fundraising and a redemption premium of 100% of the loan amount.

• Loans can be made by non-executive and investment directors (although this is not defined) but there will be employment related securities issues to consider on conversion.

• EITHER half or more employees must be UK based OR half or more of revenues must be from UK sales.

SEIS and EIS Investments

SEIS/EIS remains a very powerful tool for attracting investors and de-risking their investment to an extent. SEIS offers a 50% relief and EIS offers a 30% relief - this means that an amount equal to 50%/30% (as applicable) of the amount invested can be set against the investor’s income tax bill. If the investment is not successful and losses are made, the losses (less any relief claimed) can be set against income. These are therefore very generous reliefs and help mitigate the downside risk of what are risky investments.

Example

If an investor invests £20,000 into an EIS-qualifying investment he could claim upfront income tax relief of £6,000 (i.e. his income tax bill would be reduced by £6,000). This means that the net cost to the investor of that investment would be £14,000.

If the company fails and he receives nothing on the winding up he could set the loss of £14,000 (being £20,000 less the initial relief of £6,000) against his income generating a tax saving of £6,300 (assuming an income tax rate of 45%).

Therefore the maximum cost to the investor of the £20,000 in this example would be £7,700.