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EIS scheme question.I invested in a company (31 shares

Customer Question

EIS scheme question.

I invested in a company (31 shares in 1200 ordinary shares, 2.5%) I was totally 'unconnected' with in June 2013. I have been approached by the company to take on a Directors Role on a paid basis - and they suggested I look into the reason ITA07/S169 whereby a Director can be connected as a 'business angel' who subsequently becomes a Director. Can anyone clarify if this looks feasible or do i have to have been made a non-exec Director in June for this to stand.
Any assistance on what 'reasonable' remuneration means would also be appreciated?
http://www.hmrc.gov.uk/manuals/vcmmanual/VCM11070.htm
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I'm Keith and happy to help you with your question.

I cannot see any problem with your being made a director providing that your remuneration remains reasonable. VCM11070 makes this perfectly clear in the preamble. There is no requirement for you to perform a non-executive director's function as a pre-requisite.

I hope this will put your mind at rest.
Customer: replied 2 years ago.

http://www.hmrc.gov.uk/eis/guidance.pdf


 


1.3.2 & 1.3.3 mention about you being a non-exec director/investor/business angel and then becoming a paid Director?


 


I am querying: -


1) whether I had to have already been a non-exec in June for VCM11070 to apply (with me now becoming an Exec Director


2) What does reasonable pay mean - there is talk of year one basic salary being 35k, yr 2 50k, yr 3 75k if my expertise can generate the revenue they desire.Is this referring to staggering amounts in to 100,000 as not being reasonable?


 

Expert:  bigduckontax replied 2 years ago.
Reasonable remuneration as a director can be, as you indicate, as long as a piece of string. However a good test of reasonableness would be the remuneration paid to existing directors or directors in enterprises of similar size engaged in similar business activities. It could also reflect the level of duties required.

There is no mention in VCM11070 of any prior non-executive directorship being a preamble to a full appointment. The guidance is in respect of when the shares were issued which in your case was well before you were invited onto the Board.
Customer: replied 2 years ago.

 


 


The reference on ACCA re 'the individual' seems to hint that we are correct in our thinking: -


http://www2.accaglobal.com/uk/members/technical/advice_support/tax/capital_gains_tax/2012/eisrules


 


BUT the HMRC guidelines on 3.1.3 that I sent you before seems to indicate it applies to unpaid Director's who subsequently became paid. It is very important that I know this information by tomorrow so if you are not certain to this fact, please confirm - see info again again (HIGHLIGHTED) at 1.3.2 and 1.3.3


"


1.3.2 Connection by employment
If you are a partner, director (though see 'Business Angels' below) or an employee of the company, you are connected with it. You are also not eligible for relief if an associate (see above) is so connected. As with connection because of an interest in the company, this restriction applies not only at the time the shares were issued but to the two year period before the shares were issued and the three years after the issue (or the three years after the commencement of the trade if that followed the share issue).
1.3.3 Business Angels


However there is an exception for directors who are 'Business Angels'. Where your only connection with the company is as a Director who receives no remuneration (and is not entitled to such remuneration), and you had not previously been involved in carrying on the trade the company is carrying on at the time it issues the relevant shares, an investment may qualify for Income Tax relief.


That relief is not withdrawn if you subsequently become a paid director, providing the remuneration is reasonable. You can also claim Income Tax relief on investments made after becoming a paid director, providing that either:
• those shares are issued during the period as covered at paragraph 1.2.1 above relating to the shares issued before you became a paid director, or
• that the shares are issued before the third anniversary of the date of issue of shares in respect of which you qualified for relief under the Seed Enterprise Investment Scheme (SEIS)


Full doc is here - http://www.hmrc.gov.uk/eis/guidance.pdf

Expert:  bigduckontax replied 2 years ago.

My original answer stands, however, I do accept that it can impact onto EIS schemes. However, as a business angel you could become a director providing you receive no remuneration. Remuneration could come later and the EIS rules not breached providing the reasonable rules are covered.

Customer: replied 2 years ago.

It's the 'precise' rules that I need to know i'm afraid - if there are any.


 


As you can see I was reasonably well informed with my original question and none of your replies give me a definitive answer, perhaps due to you not having been involved with the EIS scheme in any detail, previously.


 


I do not know what the process is but can I refer this to someone else who can answer that question?


 


 


 


 

Expert:  bigduckontax replied 2 years ago.
Actually I have, however, you clearly wish to use another expert.
Customer: replied 2 years ago.

Keith,

 

As you are not sure, you have said ''I could become an unpaid Director and later become a paid Director, providing the reasonable rules are covered"

 

So that would lead me on to ask, are you certain that I don't need to have been appointed an unpaid Director in June 2013 (when I bought the shares) AND what is the reasonable length of time that you are referring to? (in between changing from unpaid to paid) - 1 week, 1 month, 3 months?

 

Originally you said I could just go straight to paid Director and when I sent you more information, you still stuck to that and have now come up with this 'covers all eventualities' answer.

 

Hence, my question has not been answered by an expert, as yet.

 

I post my question again, asking for assistance.....

I invested in a company (31 shares of 1200 ordinary shares, 2.5%) that I was totally 'unconnected' with in June 2013 which allowed me to qualify for EIS.

 

 

I have been approached by the company to take on a Directors Role on a paid basis (this could be as a Board Member or not - if it suits me from a tax perspective either way) - I thought that this may make EIS invalid.

 

 

Their Finance Director suggested that I maybe look into the reason ITA07/S169 whereby a Director can be connected as a 'Business Angel' who subsequently becomes a Paid Director and still qualify for EIS (30% income tax relief and CG exemption upon sale).

  • Can anyone clarify if this looks correct or do I have to have been made a non-exec Director in June for this to stand - refer to point 1.3.3 on the guidance pdf attached.
  • Or do I not need to have been an unpaid Director at all, prior to being a paid Director as I'm still unconnected?
  • Does the Income tax relief and CG exemption still apply if I become a paid Director in these circumstances?
  • Any assistance on what 'reasonable' remuneration means would also be appreciated?

http://www.hmrc.gov.uk/manuals/vcmmanual/VCM11070.htm

http://www.hmrc.gov.uk/eis/guidance.pdf

http://www2.accaglobal.com/uk/members/technical/advice_support/tax/capital_gains_tax/2012/eisrules

 

Customer: replied 2 years ago.

Relist: Incomplete answer. Keith hasn't answered the question which was quite specific. He has used words such as 'could', 'can't see why not' and 'shouldn't affect u' which is not what I asked. I need a definitive answer!!

I post my question again, asking for assistance.....

I invested in a company (31 shares of 1200 ordinary shares, 2.5%) that I was totally 'unconnected' with in June 2013 which allowed me to qualify for EIS.

 

 

I have been approached by the company to take on a Directors Role on a paid basis (this could be as a Board Member or not - if it suits me from a tax perspective either way) - I thought that this may make EIS invalid.

 

 

Their Finance Director suggested that I maybe look into the reason ITA07/S169 whereby a Director can be connected as a 'Business Angel' who subsequently becomes a Paid Director and still qualify for EIS (30% income tax relief and CG exemption upon sale).

  • Can anyone clarify if this looks correct or do I have to have been made a non-exec Director in June for this to stand - refer to point 1.3.3 on the guidance pdf attached.
  • Or do I not need to have been an unpaid Director at all, prior to being a paid Director as I'm still unconnected?
  • Does the Income tax relief and CG exemption still apply if I become a paid Director in these circumstances?

http://www.hmrc.gov.uk/manuals/vcmmanual/VCM11070.htm

http://www.hmrc.gov.uk/eis/guidance.pdf

http://www2.accaglobal.com/uk/members/technical/advice_support/tax/capital_gains_tax/2012/eisrules

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