“The Seed Enterprise Scheme (SEIS) was introduced in April 2012 by HMRC to help small, early-stage companies raise funds through individual investors by providing a series of tax reliefs on investments made into qualifying companies” (Syndicate Room). This makes the process of investing in early-stage businesses less risky for investors. Since 2012, SEIS has raised more than £1 billion for thousands of UK businesses.
The SEIS scheme was created to encourage investors to invest in enterprises that are less than two years old in the UK. The scheme makes it easier for businesses to attract investment by granting large tax benefits to investors. Not only do investors gain a piece of your company, but they are enjoying the tax benefits. A win-win situation.
SEIS does not have a minimum investment requirement, however, the maximum that an individual can make in a tax year is £100,000 per person. SEIS firms can accept up to £150,000 in total investment. Funds invested more than this amount as not eligible for SEIS tax reduction.
You cannot be a part of the SEIS scheme if you have already obtained funding from the Enterprise Investment Scheme (EIS) or a VC trust.
How does SEIS work?
SEIS assists you in raising cash for your new business by providing a large tax advantage to your investors – they not only invest but can also save money in the process. Using the SEIS scheme also means that if your business fails, investors can deduct a portion of their investment from their future tax responsibilities. This will not entirely compensate investors, but it will cushion the impact and provide an additional incentive to invest.
Components for SEIS:
- The firm must be engaged with a new business, and it can’t have completed a previous transaction.
- To qualify for a tax benefit, businesses can accept a maximum of £150,000 in invested SEIS
- Only individual investors are eligible (not corporations)
- The businesses must be UK-based and have been operating for less than 2 years
- Individual investors can invest a maximum of £100,000 per tax year
- It must be a legal trade or business
- Other Government Venture Capital Investment schemes cannot be used to fund the enterprise
- Some VC firms create SEIS-specific funds, in which they will invest up to £150,000 in a company
- Within 3 years of investment, the money must be spent on a Qualifying Activity
Criteria for SEIS eligibility:
- Be in a business that qualifies
- Have a UK-based business
- Be trading for less than 2 years
- Not listed on a recognised stock exchange (at the time of the share offering)
- Cannot own or control other company unless it is a qualifying subsidiary
- No plans to become a publicly-traded company or a subsidiary of one (at the time of the share issue)
- Since its formation, it has not been controlled by another entity
- You’re not a partner in a partnership
- Must have a total of less than 25 full-time equivalent employees (when the shares are issued)
- Must not have a net worth of more than £200,000 (when the shares are issued)
Advantages of SEIS:
For the business:
- Income tax reduction of up to 50% can be applied to the amount invested
- If the shares are kept for at least 3 years, no Capital Gains Tax is due on any gains from the SEIS investment
- Capital Gains Tax relief of 50% on non-SEIS investments if the profits are reinvested in a SEIS-eligible company
- If SEIS shares are kept for at least 2 years, there is no inheritance tax to pay
- The investor can claim loss relief at their highest rate of income tax if the business fails
- Tax reduction can be carried forward to the preceding tax year if the investor did not invest the max amount of £100,000 in SEIS during that year
Duration of SEIS:
SEIS is affected in 2 ways by deadlines: 1) claiming income tax reduction on investments, 2) the expiration of a company’s HMRC Advanced Assurance
- Businesses are only eligible for SEIS protection for the first 2 years after they begin trading – so you need to make sure you use it before the time limit expires
- Obtaining tax benefits
- Investors can claim income tax relief for up to five years after making an investment, starting on the 31st of the year after the investment
Invested money must be used within 3 years of the initial investment on one of the following items:
- Planning to conduct qualifying trade
- R&D that will result in a qualifying trade
- Qualifying trade
SEIS requirements for investors:
- You are not a worker for the company in which you are investing in
- You are not permitted to have any investment agreements that are tied to each other (you won’t be able to invest in the same way as another shareholder)
- You have a taxable income in the UK
- You cannot use SEIS to avoid paying taxes
- There are no loans that are related (within 3 years of your first share investment, you cannot have any loans from the company that are tied to your investment)
- In a SEIS firm, you cannot invest more than £100,000 every tax year
Alternatives to SEIS (if you do not qualify):
- EIS plan (for if your company have been in operation for more than 2 years) – this is where investors receive a tax credit of 30% of the value of their investment, rather than the 50% offered by SEIS
- Start-up loans from the Government
SEIS and Capital Gains Tax (CGT) Deferral
- Capital Gains Tax (CGT) is due when you make a profit from selling or disposing of an asset that has gained in value
- CGT is paid in the tax year in which the asset is sold
- SEIS does not allow Capital Gains on the sale of an asset to be postponed (despite the fact that deferral is not an option, there are two Capital Gains Tax reliefs available through SEIS) – 1) Reinvestment Relief, 2) Disposable Relief
- When the gains on the sale of any asset are reinvested in shares in a firm that qualifies for SEIS Income Tax reduction, reinvestment benefit is possible
- The amount of Reinvestment Relief that can be claimed is limited to £50,000
If the following requirements are met, disposable relief allows you to sell SEIS shares without paying Capital Gains Tax:
- You must have received full SEIS Income Tax Relief on the entire amount of your SEIS share subscription, with no SEIS Income Tax Relief removed
- You must have held SEIS shares for a minimum of 3 years
SEIS Loss Relief Claim:
- The opportunity for investors to obtain loss recovery is a significant benefit of SEIS (this means that if the investor’s shares in a SEIS company are sold at a loss or the company fails, the investor can deduct the loss from their income or Capital Gains Tax at their applicable tax rate)
- This is limited to a maximum of 50%
- Loss Relief is not provided for shares sold at a loss within 3 years of acquisition, however, if the firm is wound up and a total loss is sustained, Loss Relief is available even if the shares are sold at a loss during the 3-year holding period
- Loss Relief can be claimed in the year of loss, and the loss can then be applied to either the current or previous year’s tax bill. Relief can be applied to either Income Tax or Capital Gains Tax.
SEIS Re-investment Relief:
- This allows an investor to decrease their Capital Gains Tax liability by up to 50% by reinvesting some of the profits made from the sales of shares in a SEIS company, into another SEIS eligible business
- The maximum amount of SEIS Re-investment assistance that can be sought is £50,000
What is Advanced Assurance?
“Advanced Assurance is approval from HMRC that an investment in your company is likely to qualify for tax relief. Advanced assurance does not guarantee that your investment will meet the conditions, but you can use it to attract investors by showing investors your proposed investment is likely to qualify” (SeedLegals).
Investors who want to invest in SEIS should make sure the firm they’re investing in is eligible. They won’t get their tax savings if it isn’t. By requesting Advanced Assurance from HMRC, businesses can acquire proof of their SEIS eligibility. Advanced Assurance will not inform a corporation whether or not an investor qualifies for SEIS.
Advanced Assurance has no expiration date.
If the social enterprise is a charity trust, applications for Advanced Assurance can be filed by the company director/trustee/secretary. The information they will need to supply is as follows:
- Financial projections
- Business plan
- Money hoped to raise (estimated)
- Companies that will benefit from investments
- Recent financial statements
- A list of any past investments you’ve received – including amounts, dates and VC programs
- Copy of the member’s list from the time you applied for Advanced Assurance
- Details of all trading and activities to be carried out – and how much these will cost each
- A current copy of the memorandum and articles of association – and information on any amendments you plan to make
- Any other agreements between the corporation and its shareholders
- SEIS checklist (when filling out the Advanced Assurance application form)
- Any materials you use to present your proposal to potential investors, including the most recent draft (including Pitch Deck)
- Any other documents that prove you match the scheme
It is possible this process can take up to eight weeks, for HMRC to make a decision.
How to contact HMRC regarding SEIS application:
Email: email@example.com (this can take up to 2 weeks to receive a response)
Phone: 0300 123 3440
Address: Venture Capital Reliefs Team, HM Revenue and Customs, WMBC, BX9 1BN