Many start-ups will qualify for SEIS or EIS tax relief for their investors, but what about sweat equity shares? After all, they are investing in your business just as much as anyone else, so can they benefit from the tax advantages of SEIS/EIS status? In this blog, we look closely at sweat equity and SEIS / EIS to answer this question.
SEIS and EIS Tax Relief
The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are tax incentives designed to encourage investment in small and growing businesses. They provide significant tax breaks to investors who put money into qualifying companies. In return, the companies issuing the shares receive funding to help them grow and develop their businesses.
Qualifying for SEIS and EIS
To qualify for SEIS or EIS tax relief, the company, the shares, and the investors, need to meet specific criteria. Yes, you read that right. There are three groups of eligibility requirements so that the taxman can carefully control the tax breaks within the two schemes!
This means you MUST carefully review the eligibility and qualifying criteria to ensure you know your start-up status. Get it wrong, and you might fail to get investment.
One of the requirements for the shares to qualify for SEIS/EIS is that they should be subscribed for ‘wholly in cash and fully paid up at the time of the issue’. For the technically minded, this is S.257CA(4) of the Income Taxes Act 2007.
So what does this mean?
- In order to be eligible for either SEIS or EIS status, the subscription price of the shares must be paid wholly in cash (which includes payment by cheque ** and payment in foreign currency), and the cash must be paid in full by the time the shares are issued.
- The issue of shares in consideration for the liquidation of a loan or by the ‘conversion’ of loan stock does not raise money for the company – and is not an eligible investment for SEIS or EIS.
* More guidance on sweat equity and SEIS / EIS can be found on the HMRC website.
** Who uses cheques? Strange to think this legislation was only issued in 2007 – and yes, cheques were still a thing then!
Sweat equity and SEIS / EIS: does it qualify?
The short answer is, “No, sweat equity does not qualify for SEIS / EIS tax relief.”
One of the critical qualifying requirements is that the shares must be paid wholly in cash, they must be fully paid up at the time of issue, and the company must not be paying off any existing debts or bills with the investment. So this is why sweat equity doesn’t qualify.
- It is not a cash payment.
- It is paying off an “existing debt.”
- The share subscription aims to raise new money for the company – not to deal with historic bills.
Sweat equity is a valuable asset for start-ups but is not the same as a cash investment. The purpose of SEIS / EIS tax relief is to incentivise investors to put their money into new and growing businesses. Sweat equity does not provide the same financial benefit to the company as cash investment, so it is not eligible for SEIS / EIS tax relief.
Set your start-up up for success
Sweat equity and SEIS/EIS tax relief serve different purposes in the world of start-ups. While sweat equity is a valuable asset, it does not qualify for tax relief. To take advantage of SEIS or EIS, the company must issue shares that are fully paid up in cash and not used to pay off existing debts or bills.
As a start-up founder, it’s essential to understand the difference between sweat equity and cash investment and the eligibility requirements for SEIS and EIS tax relief. By doing so, you can make informed decisions about how to raise capital for your business and set your company up for long-term success.
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