Seed Enterprise Investment Scheme (SEIS)

The SEIS (Seed Enterprise Investment Scheme) was formed by HMRC in early 2012 with the aim of helping smaller start-up business to raise finances via investors. This is done by delivering a number of tax relief on investments, which aid the development of companies which qualify.

This scheme enables companies the ability to claim relief of up to £100,000 invested per year. This means they could collect reliefs totalling 78% or more of their investment. Companies that qualify for SEIS able to be invested in either indirectly via a SEIS fund, or directly.

The Seed Enterprise Investment Scheme offers a range of different tax reliefs for potential investors. These range from loss relief, to avoidance of Capital Gains and automatic reductions. Search tax reliefs will usually depend on the tax bracket you’re in and so you should have some prior knowledge of what this is.

Furthermore so as to take advantage from many of the different kinds of tax relief it’s a necessity that you have held qualifying shares for at least 3 years.

The Seed Enterprise Investment Scheme provides the following to investors:

• Loss relief, should the business fail (regardless of whether this falls within the hold period of 3 years.)

• Capital Gains exemption on earnings through shares

• Relief of 50% of the total investment, via Individual Income Tax

• Exemption from Capital Gains on profits both created within 3 years and having been reinvested into the SEIS

The regulations regarding the kind of business that can qualify for SEIS investment is sometimes complex. Whilst there isn’t a way of guaranteeing that an investment will benefit from eligibility to the SEIS, businesses are entitled to begin the application process directly to HMRC for a SEIS ‘advance assurance’. This aims at giving an initial indicator as to whether or not a business is a suitable candidate when applying for tax relief for investors.

Frequently Asked Questions

Who is eligible for relief?

The following rules need to be adhered to, for 3 years or more, otherwise, any tax reliefs may be removed. The company:

• Is committed to a new qualifying trade

• Has been formed within the UK

• Is – at the time of issuance – an unquoted company and isn’t planning on becoming one

• Has gross assets which total less than £200,000

• Is not controlling any other business, other than other qualifying subsidiaries

• Isn’t a member of a partnership, nor any of related subsidiaries

• Is not under the control of any other company or companies

• Has – at the time of the issuance – under 25 employees working full-time

• Has not in the past, nor is currently receiving any investment by either a venture capital trust or the Enterprise Investment Scheme

• Must spend the finances raised from the investment on the eligible company activity before 3 years from the issuance of shares

• Before the issuing, must make sure that any investment is the first subject to the EIS or VCT scheme

Who is not eligible?

Those investing mustn’t be held – either directly or indirectly – over 30% of the business’s regular share capital, (as well as its issued share capital) or voting rights. Any investors who are also employees of the company will not be able to benefit regarding these points either. However, new or current directors can qualify for this. Regardless of whether the business meets each of the required criteria, it won’t have eligibility should that investment not be undergone for realistic, commercial purposes and not with a primary reason of tax avoidance.

What type of shares qualify for SEIS relief?

The kind of shares that are eligible for SEIS relief must be new shares without any special rights assigned to them. They have to be subscribed only in cash (meaning that the consideration must not be through other assets) and this cash needs to be paid fully before the issuance of the shares.

The aim of the shares being issued, is primarily for the raising of money for a qualifying company. The finances that are raised have to be used in a qualifying trade, and continued on by the parent company (or 90% subsidiary), within 3 years.

Shares that were issued either on or after 15th March 2018, must meet the condition known as ‘risk to capital’, so as the SEIS relief can be made available. This condition is meant as a way of excluding investments which are created to maintain capital for investors.

If this condition is adhered to, keeping in mind all other circumstances, it would be a fair conclusion that the issuing company has targets to expand and innovate its trade over a longer scale of time. For the investor, therefore, it could become a risk that they would lose a larger amount of capital when comparing it with their net investment return.

What is the Compliance Statement form?

The Compliance Statement form is used by the invested business to verify that specific conditions within the scheme are upheld.

The Compliance Statement form can’t be submitted until:

• More than 70% of the money raised by the issued share is used solely for reasons relating to the activities of the qualifying company

• The new qualifying business which consists of the qualifying trade activity, or by which the specific activity relates to, has been undertaken for over 4 months by either the business issuing the shares or a subsidiary of that company, holding a qualifying 90%

• If for whatever reason, the decision is made not to commence with the investment and that it may not be meeting the required SEIS conditions, then you are able to review and/or appeal against this decision

What other documents do you need?

• A covering letter

• The SEIS advance assurance form (if this has been applied for)

• A Business Plan

• A note of any minimal aids you may have received

• Your tax reference number

• A Shareholders agreement

• The company accounts

• The SEIS advance assurance form (if this has been applied for)

• The amount which is looking to be raised

• Articles of Association

• An outline of the purpose of these finances

• A note of any minimal aids you may have received