ONE of the most common and persistent issues for small businesses seems to be access to capital.
Despite government backed lending schemes, some businesses still struggle to raise the capital they need.

In some cases this is down to the fact that their business plans are not sufficiently convincing to their bank, but in other cases it is because there is a significant element of risk surrounding the launch of a new product or venture.

Banks generally dislike high degrees of risk or uncertainty and that is why successive governments have offered tax incentives to encourage individuals to invest in small businesses seeking to raise “risk” finance.

The rules backing these tax incentives are complex, but the tax benefits can be huge.
The Enterprise Investment Scheme (EIS) offers investors an income tax rebate of up to 30% of the amount invested in qualifying companies, exemption from capital gains tax if the investment is sold at a profit and further income tax relief if the investor makes a loss.

It can also be used to shelter other capital gains and is exempt from inheritance tax after two years.
EIS has been around for many years and we have used it to help clients seeking to raise capital for things as diverse as publishing, film production, acquiring a golf club, vehicle manufacturing, operating restaurants, investment management and selling video downloads.

The current government introduced a new relief based on EIS but aimed at very small companies.

The new relief is called the Seed Enterprise Investment Scheme (SEIS).

The income tax relief for an SEIS investment is up to 50% of the amount invested and there is a very generous capital gains tax relief.

There is however a much lower cap on the amount that can be invested through SEIS - £100,000 a year for an individual investor and £150,000 in total for the company raising capital.
The rules for both EIS and SEIS include restrictions on how much of the company an investor (taken together with certain relatives and business partners) can own and on various other matters.

Companies – and investors – can fail to qualify because of apparently minor failures to meet the rules and HMRC polices these reliefs carefully.
The advice is the same as always when dealing with tax: take expert advice and take it at the earliest possible stage.
  
*Paul Aplin OBE is a tax partner with A C Mole & Sons and chairman of the Technical Committee of the Institute of Chartered Accountants in England & Wales Tax Faculty; you can follow him on Twitter @PaulAplinOnTax. He and fellow tax partners Amanda Gunter and Paul Kingdom can be contacted on 01823-624450.