Seed Enterprise Investment SchemeJacqueline McGregor
The Seed Enterprise Investment Scheme (SEIS)offers seed investors extremely generous tax reliefs and this greatly helps raise much needed seed capital in new businesses. The tax reliefs are even more generous than under the Enterprise Investment Scheme (EIS) reflecting the fact that this is usually, at least on paper, a higher risk investment.
For investors the main benefits of the SEIS are as follows:
- Income Tax relief worth 50% of the amount invested to qualifying individual investors on a maximum annual investment of £100,000.
- A 50% exemption from Capital Gains Tax on gains reinvested within the scope of the SEIS.
- Disposals of SEIS shares are exempt from Capital Gains Tax once they have been held for three years and certain qualifying conditions are met.
Investments in SEIS will also usually qualify for Inheritance Tax reliefs. The availability of both Income Tax and Capital Gains Tax relief makes the scheme very popular but investors must of course consider the importance of picking a good company to invest in and carry out proper due diligence. There is also tax relief available should the SEIS shares be ultimately sold at a loss or become worthless.
The tax relief is given by reducing an individual’s overall tax liability with the proviso that there is a sufficient liability against which to set it. It is also possible for the investment to be carried back to the preceding tax year in order to maximise any unused relief.
Directors of a company looking to raise finance may invest under the SEIS but only if they qualify. They cannot hold more than 30% of the company’s issued share capital, of its voting rights or of the rights to its assets in the case of the business being wound-up. If these limits are exceeded, this is known as ‘substantial interest’ and the director would not qualify to invest. Employees of the company do not qualify for investment in the SEIS.
The main conditions that a company must meet in order to obtain SEIS qualifying status are:
- The maximum amount of funds that a company can raise through investments qualifying for SEIS is £150,000. This includes any State Aid funding received prior to the issuing of SEIS shares.
- There is a maximum limit on the number of employees that the investee company can have when shares are issued. The company must have less than 25 full-time employees for the SEIS or their part-time equivalents. For groups of companies, the limit applies across the group.
- The company’s gross assets (or of the group assets where the company is a parent company) must be less than £200,000 at the time of a relevant SEIS share issue. HMRC’s general approach is that gross assets, means all the assets which would be shown on the balance sheet, without any deduction in respect of liabilities.
- The company must not be in financial difficulties.
- There are also time limits as to when investments can be raised by the company and how and when the money must be spent.
The company cannot have received any investment under either the EIS or VCT schemes before using the SEIS to raise investment. However, the SEIS compliments the other schemes and further investment can be raised using the EIS or VCT scheme after the SEIS.
We would recommend getting pre-approval from HMRC as to whether your company is eligible. It is important to note that the advance assurance service provide by HMRC is a discretionary, non-statutory, service. HMRC no longer provides advance assurance on speculative applications. This leaves some start-ups in a Catch-22 situation where it can be hard to attract investment without advance assurance. However, HMRC does not require the company to have formalised offers of investment but rather to have some potential investors on board who are likely to invest if advance assurance is granted.
There are many risks to investing in early stage potentially high growth businesses and at the very least investors want to know that their investments will benefit from the advertised tax breaks. This can be very difficult without having advanced assurance in place.
We can help with the actual raising of finance and once this finance has been raised we can assist with ensuring that the funds are spent on a qualifying activity within the necessary timeframe and confirm that everything is done in compliance with the rules. The importance of advance planning to raise finance cannot be understated.
Please let us know if you would like to find out more about how the SEIS can help you personally or your business.