What is SEIS and how can you benefit from it?

The Seed Enterprise Investment Scheme – or SEIS – is a special tax incentive scheme designed to help very early-stage companies attract investment. If you’ve been speaking to investors they’re sure to have mentioned it. Most individual investors will expect to get the valuable tax reliefs that come from investing in an SEIS qualifying business (if the business is young enough, and small enough, to qualify). This guide will help you answer the following questions:

  • Can my company qualify for EIS?
  • If it does, what’s the benefit to my investors?
  • What kind of investors can qualify?
  • Does the investment need to be structured in any particular way?
  • How does it work in practice?
  • Do I need to do anything after issuing SEIS certificates?

Larger and more mature businesses will need to consider whether they can qualify for SEIS’s older sibling, the Enterprise Investment Scheme (EIS). We have a guide on that scheme available here. There is also a scheme which incentivises investment from Venture Capital Trusts (the VCT scheme).

This guide gives a summary of some of the key conditions which must be met to obtain the various reliefs. The full conditions are very wide-ranging and have evolved to counter various tax avoidance schemes and perceived abuses of the generous tax reliefs available. The gov.uk website contains a good description of all of the conditions and is helpfulfor those looking to investigate further.

Can my company qualify for SEIS?

  • Firstly, your company must exist wholly for the purposes of one or more “qualifying” trades for three years after an issue of SEIS-qualifying shares. Not only are investment companies excluded, but the company must also not be carrying on certain kinds of excluded trading activities e.g. trading in land or securities, various financial and professional services, leasing businesses, hotel and nursing home businesses – a full list of excluded activities is available by following this link. If your company has subsidiaries then this test – and all the qualifying criteria - must generally be met by looking at the group as a whole.
  • Because SEIS is targeted at young companies, businesses which are more than two years old cannot benefit. Periods in which the business was carried on by a previous owner count for these purposes (so you cannot, for example, transfer an old business into a new company and qualify for SEIS).
  • The company issuing the shares must have a “permanent establishment” in the UK (broadly, a business presence here) but that does not prevent it having business establishments overseas, or overseas subsidiaries.
  • SEIS is also aimed at small businesses, so the company must have gross assets of less than £200,000, and fewer than 25 full-time equivalent employees. The “gross assets” test measures a company’s assets ignoring any liabilities or debts. So a company with assets of £20m and debts of £20m will have gross assets of £20m, and will not be able to attract investments under the SEIS regime.
  • The company must not have issued EIS or VCT-qualifying shares to anyone else. Once the company has issued SEIS shares it can consider issuing EIS and VCT-qualifying shares, but any SEIS shares must come first.
  • The company cannot be listed on a stock exchange and it must be independent (for example, not under the control of any other company, although it’s acceptable for it to be majority owned by an individual).
  • The company must also be able to demonstrate that there is a real “risk-to-capital” for all investors rather than merely aiming to preserve capital asset values. This condition was introduced to ensure that heavily asset-backed trades could not secure tax-favoured investment. SEIS (like EIS and VCT) is designed to encourage investment in entrepreneurial businesses that carry real risk, which is where the Government feels that the tax reliefs can do most good.
  • The company must also spend the money on the intended qualifying trade within three years of the investment. Hoarding SEIS money is not encouraged!

If it does, what’s the benefit to my investors?

SEIS is targeted at small, young companies, so it’s quite restrictive. However in return it is the most advantageous in terms of the tax benefits on offer.

SEIS investors can get income tax relief equal to up to 50% of their SEIS investments (up to £100,000 annually). For example, if an investor invests the maximum £100,000 they will get £50,000 of tax relief. So, if they have other income that gives rise to an income tax bill of £75,000 in that year, this bill will be reduced to £25,000 by the relief. If the whole relief cannot be used in the tax year of investment, there is scope to carry it back to the previous tax year.

There are also capital gains tax (CGT) reliefs, namely (1) 50% of any amount invested in SEIS shares can be set-off against the taxable gain on a completely separate asset in order to reduce the tax on that separate asset, and (2) sale of the SEIS shares after three years is also generally free from CGT.

Finally, loss relief is also available. If an investor acquires SEIS shares and they ultimately make a loss, then that investor can claim that loss (net of income tax reliefs given up-front) against both capital gains and income to further reduce their tax bill.

Reliefs are generally only retained if the investor holds on to the shares for three years or more. In this way the scheme is trying to incentivise sustained investment rather than short-term speculation.

What kind of investors can qualify?

SEIS reliefs are only available to individual investors (not companies or partnerships looking to invest). Because the reliefs are available against UK tax it will mostly be UK tax-resident individuals who are interested in investing for SEIS. You may also come across SEIS and / or EIS ‘funds’ – these are different to many fund investors because they use a nominee structure, so that the ‘fund’ investment is in effect lots of investments from the individuals participating in the structure.

A qualifying investor must not have a substantial interest in the company (being a 30%+ holding), either on his own or together with any associates of his (for example, business partners, spouses, children). Employees cannot generally qualify unless they are also directors of the company.

Does the investment need to be structured in any particular way?

The investment itself should be for ordinary shares which are fully paid-up for cash. The maximum amount of SEIS money which one company can receive in a year is £150,000. It’s important to take care with the investment process. For example, individuals won’t be able to benefit from SEIS if they lend money to the company, with a plan to convert it into shares in due course. The SEIS shares must be issued immediately in exchange for a fresh injection of cash.

The £150,000 allowance is reduced by certain kinds of state aid received from other sources, so be careful if you are benefiting from any other state aid scheme.

There is also an overriding requirement that the shares be subscribed for genuine commercial reasons and not as part of a tax avoidance scheme.

How does it work in practice?

Companies looking to accept SEIS investment can seek advance assurance from HMRC that the proposed investment will qualify by writing to them with full details. This is not compulsory, but some investors may insist that advance assurance is obtained as a way of getting comfort that they will receive the expected tax reliefs. HMRC provide details of the process, and forms for EIS/SEIS advance assurance, on their website. However, HMRC’s policy is only to accept clearance applications from companies which have already lined up (and can name) the prospective investors. Clearance cannot therefore be obtained speculatively.

Once the investment has been made, SEIS investors will need a certificate from the company in order to be able to claim the tax reliefs through their self-assessment. In order for the company to have the authority to issue these certificates, it must formally request HMRC’s permission using form SEIS1. In order to be able to submit a form SEIS1 the company must either:

  • have spent 70% of the money on the qualifying business activity for which it was raised;
  • or have carried on that qualifying business activity for at least four months.

In these forms the directors of the company confirm that the relevant conditions have been met. Assuming they don’t spot anything wrong, HMRC will then formally authorise the company to issue a separate certificate (SEIS3) to the individual investors which they then use to claim the reliefs in their self-assessment returns.

Do I need to do anything after issuing SEIS certificates?

The SEIS regime requires some of the conditions to be maintained for at least three years after the share issue in order for investors to hold on to the tax benefits of their investment. Not all of the conditions need to be met throughout that period – the company might grow in size such that it couldn’t attract new SEIS investment for example, but that’s fine. Existing SEIS investments won’t be disqualified. However there are many ways to lose the reliefs – for example, if the trade shifts into a non-qualifying area of business, or if the business leaves the UK altogether, or if the company comes under the control of another company, or if the company makes a prohibited return of value to some or all of its shareholders.

If you successfully receive investment under the SEIS regime it is important that you’re fully aware of what you must and must not do in order to maintain the reliefs. Not only could you come under an obligation to report breaches to HMRC, but your investors could lose all of the reliefs that they have claimed and have to pay CGT when they sell the shares.

If you’d like to talk through your start-up investment options, please get in touch.

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