Setting up cant be done cheaply
Livestock farmers setting up a meat processing company
under the Enterprise Investment Scheme can gain important
tax breaks. But setting up such a firm will involve buying in
a lot of expertise if serious mistakes are not to be made
TRIPLE S Ranch was set up as a plc meeting the requirements of the Enterprise Investment Scheme (EIS). "That meant investors who bought shares in the company when it was floated could claim their investments against income tax at 20%, provided they held the shares for at least five years. After that five-year period any capital gains on the shares would also be exempt from capital gains tax. I understand there are also potential benefits for those wishing to defer capital gains tax, though shares bought for that purpose would not qualify for income tax relief", says Triple S chairman David Hill.
He warns that setting up such companies correctly cannot be done cheaply, and that mistakes could prove very costly. That was why they took specialist advice from Nigel Warren at Ernst and Young in Exeter.
Mr Warren stresses the importance of making sure the proposed company will qualify for inclusion in the EIS. He also points out that potential investors should be clear about rules which may prevent them from benefiting from the tax concessions.
He first had to establish that buying cattle, having them slaughtered and cut up on contract, and then selling the cut-up meat was a qualifying trade. (The company now cuts up its own carcasses and that also meets EIS requirements.) He also had to confirm that the proposed company and any of its subsidiaries would be at least 75% owned by the shareholders.
The next step was submitting the company details to the Inland Revenue for advance approval. This typically takes 30 days, and so it is important to allow enough time for it in the schedule.
After four months successful trading the company has to complete an EIS1 form, confirming that it is doing what it said it would. If the Inland Revenue accepts it as a qualifying company, it will issue tax certificates to the shareholders.
Mr Warren also had to ensure that Mr Hill and his co-directors knew that the activities of the company must continue to qualify. He also advised them to check with him before changing the companys activities.
To qualify for EIS, the maximum value of the company must not exceed £15m before the share issue and not more than £16m after the issue. Maximum individual investment is £150,000, and the minimum is £500. Tax relief at 20% is against tax liability, and under certain circumstances up to half ( to a maximum of £25,000) can be carried back to the preceding tax year.
If a loss is made on disposal of the shares at any time, the loss (after allowing for any income tax relief already received) can be set against the individuals chargeable gains or taxable income in the tax year in which the disposal occurs. Capital gains on EIS-qualifying shares sold after five years are not liable to tax. There may also be advantages regarding inheritance tax relief.
All money raised by the share issue has to be used for the qualifying trade within 12 months.