First launched in 2012, the Seed Enterprise Investment Scheme (SEIS) is designed to make it easier for start-ups and other young companies to attract investment. The scheme offers generous tax incentives for individuals who are prepared to take a punt on a business while providing additional funds to help the enterprise grow. So how does SEIS work in practice and what are the main considerations for small business owners and potential investors?
The SEIS – What’s in it for investors?
- Under the scheme, individuals who put money into your business can claim initial tax relief on up to 50% of the total amount they invest, capped at £100,000 per tax year, provided they hold the shares for at least three years.
- They can also apply to carry back tax relief on their income tax bill for the previous year.
- The investor won’t have to pay capital gains tax on profits made following any sale of shares as long as they have held the shares for at least three years.
- If the venture fails, the investor can claim relief for losses made during the investment against taxable profits or other sources of income.
- Investors can also get 100% inheritance tax relief on the value of the shares two years from the date of their initial purchase.
Qualifying conditions for investors
As a small business you may be actively looking for people to put money into in the business but you need to be sure potential investors actually qualify for the benefits that SEIS offers. The following criteria apply:
- The investor is an individual and not a trust or other corporate entity.
- He or she is liable for income tax in the UK.
- The individual investor can be a director of your company although not an employee and can’t hold more that 30% of share capital, have voting rights or rights to assets should the company be wound up.
- He or she can’t have invested over £100,000 in SEIS qualifying companies in the same year.
Do you qualify for investment through SEIS?
Make sure your company meets the following conditions to be eligible for investment under the scheme:
- You operate in the UK or carry out a substantial amount of your work from a permanent base in the UK.
- Your business is an unquoted company.
- Your company is not trading on a recognised stock exchange.
- Your asset value is not more than £200,000.
- Your company employs fewer than 25 employees.
- To be eligible, your company must also come under one of the ‘qualifying trades or activities’ according to HMRC (see below) and your aim is to make a profit.
- Your company should be less than two years old.
- Your company hasn’t previously received investment through the Enterprise Investment Scheme or the Venture Capital Trust.
Non-qualifying or excluded activities
Non-qualifying trades or activities include certain financial activities such as dealing in commodities, land, securities or other financial instruments. If you provide legal or accountancy services, operate or manage hotels, operate or manage nursing homes, or your company is involved in farming or forestry, you will not qualify for SEIS. This list is not exhaustive, for more information, see below.
Shares and rights
Under SEIS, tax relief only applies to ordinary shares. This means you can’t offer potential investors shares with additional rights such as preferred rights to a dividend or rights to a higher return on the capital if the company is wound up. Not sure about the status of your company chares? Unless you have amended the model articles since the company was incorporated or varied rights attached to shares, shares in your company will be ordinary shares and as such, will qualify for SEIS relief.
Before committing to anything, you can use the ‘advance assurance’ facility on the HMRC website (see below) to get confirmation that the investor will benefit from SEIS. All being well, you can proceed although you won’t be able to allot new shares until you have received SEIS investment funds in full. Allotment of shares will also have to be set out in a shareholder agreement and formally noted by the board and at a meeting of shareholders.
The availability of tax relief under SEIS, may vary depending on the investor and your own company circumstances. The scheme itself may be subject to change in future, so always make sure you understand what tax relief is available before going ahead with any proposed investment, seeking professional tax advice if necessary.