EIS rules and benefits for investors explained
Invest in EIS-eligible companies to get generous tax relief. We set out the rules and benefits for investors.
Over the past year many businesses took out £50K Bounce Back Loans (BBLS). Some of those companies have raised SEIS funding over that period, or are about to. What many people don’t know is whether that Bounce Back Loan counts as de minimis aid which will reduce the amount of SEIS that you can offer to investors.
So, here’s your definitive guide to Bounce Back Loans, SEIS, de minimis aid, how it affects you, and what to do if you learned this too late.
De minimis aid is, broadly, state aid, which includes certain types of funding, grants or loans that you received from the government. Not all government funding is de minimis aid, but if you have received any that is and you’re planning to raise SEIS investment, you should carefully check whether that specific funding counts as de minimis aid (for the answer on BBLS, keep reading…).
A company can raise up to £150K in SEIS less all de minimis aid received in the 3 years up to that date. This means that if you received £50K in de minimis aid, you can only offer £100K SEIS to your investors (anything after that would need to be EIS).
Here it gets interesting!
BBLS defines a business as in difficulty if on 31 December 2019 the company had accumulated losses that are greater than half its subscribed share capital.
This doesn’t apply to businesses with fewer than 250 employees that, on 31 December 2019, had existed for less than three years.
This means that if your company was less than 3 years old at the end of 2019, you’re in the clear.
So, if the company is not considered a “company in difficulty” and your only applied to have the extra cash just in case, good news, you can still raise the full £150K SEIS in your next round.
HMRC’s view is the unless the company obtains confirmation from the British Business Bank or BEIS to advise otherwise, then once a company in difficulty receives that loan, the de minimis aid has been received, and early repayment would not alter this fast.
For a company that’s not in difficulty, the loan wouldn’t count as de minimis aid regardless.
So far as we’re can confirm, interest paid on your Bounce Back Loan will NOT count as de minimis aid.
Many people reading this would be thinking about now… oh… I totally didn’t realise that Bounce Back Loans could affect my available SEIS! The good news is that, unless your company was a company in difficulty, it won’t affect your SEIS.
But, what if you did raise £150K in SEIS, you were a company in difficulty, and you got a £50K BBLS loan…? That means you gave investors more SEIS than you were allowed to. In that case there’ll be an awkward conversation with your investors where you’ll need to tell them that e.g. only 2/3rds of their investment will be SEIS, the rest will have to be EIS.
If your company wasn’t a company in difficulty then, as mentioned above, there’s no problem with SEIS and BBLS.
However, if your company was a company in difficulty is you raised SEIS (and issued the SEIS shares) before you got a BBLS loan, then:
When you do your SEIS/EIS Compliance on SeedLegals we’ll help you sort all this, it’s all part of our service.
De minimis aid (and State Aid more generally) forms part of the UK’s arrangements with the EU to ensure a level playing field for state subsidies. With Brexit, that’s all changed. What are the new rules? Well, that’s hard to say, even HMRC’s web page on State Aid starts with a big message saying This guidance was withdrawn on 1 January 2021… but no new guidance has been added yet. So all this may be about to change. We’ll update this article as we learn more.
Important: This article is not legal or tax advice. The de minimis rules are complex and changing rapidly due to Brexit and the various Covid relief schemes. You should seek independent advice as needed based on your specific situation.