The Reliefs
Launched in 1994, the Enterprise Investment Scheme (EIS) was introduced to facilitate investment in businesses. The Seed Enterprise Investment Scheme (SEIS) was introduced in 2012 with the same premise but aimed at early-stage companies.
Broadly:
- Investors in EIS companies can qualify for 30% income tax relief on subscription (subject to an annual £1 million cap, or £2 million for "knowledge-intensive companies"), a CGT exemption on disposal of the shares, and CGT deferral on certain reinvestments.
- SEIS investments qualify for 50% income tax relief (capped at £200,000 per annum) and similar CGT reliefs.
Given these generous tax breaks, numerous conditions must be satisfied for three years from the date the shares are issued.One such condition is the UK permanent establishment (PE) requirement for foreign companies. Historically, the schemes were limited to UK companies, but from 6 April 2011 this rule was replaced with the permanent establishment rule, allowing foreign companies to raise funds under EIS and then SEIS. It was recognised that there was an increasing number of foreign companies wanting to expand into the UK which may require additional investment. The PE rule is often overlooked and can cause problems for eligibility under the schemes.
A company has a UK PE if:
- it has a fixed place of business in the UK through which the company’s business is wholly or partly carried on (such as an office, factory, branch, workshop); or
- an agent acting on behalf of the company who has and habitually exercises their authority to enter into contracts on behalf of the company.
Misconception
A common misconception is that having a UK subsidiary automatically satisfies the PE requirement for the foreign parent company seeking S/EIS investment. However, HMRC is clear that the company issuing shares under S/EIS must itself carry on business in the UK through a PE.
Simply having a UK subsidiary or branch structure is insufficient if the entity raising funds does not itself have a PE. In practice, a foreign parent company cannot rely on its UK subsidiary’s PE status to qualify for S/EIS relief. The investment must be made directly into the entity with a PE in the UK.
In summary, the PE requirement under S/EIS ensures that the tax relief supports genuine UK business activity. Foreign companies must carefully structure their operations to meet this test if they wish to attract UK investment via S/EIS.