Contractors' Questions: Can I get tax relief on my website business?

Contractor’s Question: I’m looking at launching a new website business for my Plan B, with the help of three IT industry contacts who I have known for about a decade. According to one of the trio, we might be eligible for EIS tax savings on our investment. However it appears to me that the scheme is for external investors only. Is he right that EIS could benefit us or would we be precluded?

Expert’s Answer: It is the case that the four of you could potentially obtain 30% income tax relief under the Enterprise Investment Scheme (EIS) or even 50% income tax relief through the Seed EIS (SEIS), on your initial investment.

But there are even greater rewards on offer with either of these schemes, as EIS and SEIS qualifying shares become exempt from capital gains tax once they are held for three years.

Bear in mind though, there are strict conditions attached to these valuable tax breaks. For example, if any of your party own more than 30% of the shares, you will not qualify for EIS. As a result, and to remain below 30%, it is recommended that you all invest at the same time.

In addition, the issue of shares and payment for them must occur at the same time, otherwise HM Revenue & Customs will consider the shares to be unpaid or not acquired for cash – in both instances the shares would not be allowed. So before the four of you pour your money in, the company should be formed and have its own bank account.

Then there is the question of who should hold the shares that are issued when the company is formed. This question arises because the subscriber will lose his chance of EIS relief if the business is already planned.

As a workaround, have the company formed by an unconnected shareholder who opens a company bank account and then have the four of you invest in new shares. Remember to subsequently remove the unconnected person – from both the company and its bank account – once the shares are issued.

The expert was Jon Sutcliffe, partner at Top 20 chartered accountancy firm Kingston Smith LLP.