May 27th, 2014 / Insight posted in The Sunday Times Business Doctor

State grant may hit investors’ tax relief

PG writes: I am raising a £150,000 investment for my company through the Seed Enterprise Investment Scheme (SEIS). But I have also been offered a government grant of £20,000 for a project. Will this cause any problems for my SEIS investors?

This could be an issue for your investors as both SEIS and some state funded grants are considered to be state aid under EU regulations, writes Jon Dawson, partner at Kingston Smith LLP. The regulations allow up to €200,000 of de minimis state aid in a rolling three-year period. De minimis incorporates small amounts of aid that are not given under approved state aid schemes or where there is a general EU exemption.

Grant funding agencies will be able to advise if their grants fall under the de minimis rules. Other common types of de minimis state aid can include business rate discounts in enterprise zones, the regional employer national insurance contributions holiday, and government Growth Vouchers.

If the grant is classed as de minimis state aid funding and you receive it before taking the investment, you will be able to raise only £130,000 through SEIS. Its rules allow up to £150,000, including de minimis state aid received in the three years before investment. Your investors may still be comfortable investing the full amount and apportioning the SEIS relief, but you may find that it deters some.

Alternatively, if you raise the £150,000 investment and issue the qualifying shares before receiving any other forms of state aid, this would not cause a problem under SEIS rules. You may, however, be required to disclose this to the grant funding agency, which will assess whether you still qualify.

You should also consider how the grant may affect any research and development (R&D) you are undertaking. Certain types of grant funding can preclude you from claiming R&D tax credits under the more generous R&D tax relief scheme for smaller companies, but you may still qualify for the large company scheme.