New businesses face many challenges and hurdles. Ask any founder about the most difficult, and usually, the answer will be securing the early funding needed for the company to establish a footing in its industry.
It is an extremely difficult situation, as investors are aware of the risk involved in investing in early-stage businesses. Around 60% of all UK startups fail within their first three years, and less than 40% are still trading after five.
It’s understandable that investors are wary when you look at figures like those.
The government understands the situation, too. It has developed initiatives designed to lower investors’ risks while increasing the chance of funding new businesses.
One such initiative is the Seed Enterprise Investment Scheme. Startups can receive investments of up to £250,000 from investors who have been offered massive tax reliefs as an incentive to use their money to help nurture new businesses.
They can receive 50% income tax relief on investments up to £100,000 and avoid paying capital gains tax (CGT) if profits are made. They also have other benefits, including loss relief, CGT referrals, and inheritance tax relief.
If you’re seeking investment for your young business and have not heard of SEIS before, we explain the initiative in more detail throughout this guide.
What is the Seed Enterprise Investment Scheme (SEIS)?
The Seed Enterprise Investment Scheme is the UK government’s answer to the above dilemma.
Introduced in 2012, it became the second venture capital scheme alongside the Enterprise Investment Scheme (EIS), which was also created to stimulate the economy through private investment in UK companies.
The idea is that increased investment in young companies will stimulate the UK’s economic growth and foster innovation. Every success story is a boost to the economy. More taxes are paid, and more employment is given.
Most investors are not stupid. They know that investing in smaller companies at the start of their journey carries more risk than putting money into those that are more established.
Therefore, the SEIS aims to boost this type of investment by promising significant tax relief to investors as an incentive.
Investors receive various tax reliefs in return for investing in SEIS-qualifying companies. Benefits from SEIS investments include income tax relief, capital gains tax exemption, loss relief, and capital gains reduction.
What are the Advantages of the Scheme for SEIS Companies?
The obvious benefit for any SEIS-qualifying company is the potential to receive an investment of up to £250,000 via the sale of company shares.
A single investor can invest up to £200,000 a year into the SEIS scheme.
It is important to note that any funds raised by a SEIS company must be spent on:
- Company expenses such as marketing, increased staffing, or new equipment.
- Research and development that can enhance the company’s growth potential.
Furthermore, received investment from the SEIS fund must be spent within three years of receiving it.
What are the Advantages of the Seed Enterprise Investment Scheme for Investors?
Investing in a start-up company carries greater risks for investors. Therefore, while there are also high rewards in return for that risk if the company takes off, many investors look for safer investment opportunities.
The SEIS scheme was created to incentivise investors to take on the added risk. The most significant advantage is the tax relief an investor receives from participating in the initiative.
An investor will receive income tax relief, capital gains tax relief, and loss relief as part of the SEIS investment scheme. While most are designed to mitigate losses from a failed investment, they also ensure a double win for investors who enjoy a successful investment.
Income Tax Relief
Investors qualify for up to 50% income tax relief on the SEIS-qualifying shares they purchase. As the current annual investor limit is £200,000, the maximum an investor can receive in tax relief is £100,000.
That relief can be applied to shares for the tax year they were issued or the previous year. When completing your tax returns, make sure you clarify how you want the tax reliefs spread out.
You can split the relief across the two years as you see fit. For example, you could split it 50/50 or use 75% for the current year and 25% for the previous year.
Capital Gains Tax Exemption
Any profits derived from the sale of SEIS shares are exempt from Capital Gains tax as long as they’ve been held for at least three years.
CGT is a tax on profits made from any assets you sell. It is 18% for basic rate taxpayers and 24% for higher rate taxpayers.
Assuming you made a £50,000 investment through the SEIS and sold the shares for double your investment. Depending on your tax rate, you’d normally be subject to £9,000 or £12,000 CGT.
That tax is written off through the SEIS, making it one of the scheme’s most attractive benefits.
Loss Relief
If an investment is unsuccessful, investors lose money. That is the risk involved when buying shares in a start-up company.
The good news is that the government provides loss relief in this situation. Claiming loss relief on SEIS shares allows investors to set the loss amount against their income tax or CGT bill in the current tax or previous tax year.
There are three possible scenarios when an investor might make a loss relief claim:
- If a company founder decides to sell their business, an investor’s shares are usually transferred to the new owner. If they’re sold at a profit, there’s no problem as long as the investor has held them for at least three years and is eligible for income tax and CGT relief. If sold at a loss, however, the investor could be eligible to make a loss claim.
- If the company is liquidated, investors could claim loss on their ‘deemed disposal’ shares. Depending on how long the shares were held and the circumstances behind the liquidation, the amount of income tax an investor receives could change.
- If the company is in what’s deemed a ‘zombie’ state, it is trading but not making enough money to grow. It makes just enough money to carry on, but that’s about it. The investor cannot sell his shares because the company cannot afford them. In this situation, investors could receive loss relief on those shares.
Capital Gains Reduction
Another incentive to make SEIS investments is the capital gains reductions investors can claim when liquidating other investments to increase capital for the SEIS scheme.
Any profits from liquidating shares from other investments qualify for 50% tax relief.
In short, the Seed Enterprise Investment Scheme aims to make investing in new companies more attractive and safer for investors.
How to Know if Your Company Qualifies for the Seed Enterprise Investment Scheme (SEIS)?
Your company qualifies for the scheme if it meets the following criteria:
- It must be a UK company.
- It should be involved in a qualifying trade.
- Your company must be younger than three years old.
- Your company’s gross assets should be no more than £350,000 at the time of share issuance.
- It isn’t listed on any stock exchanges.
- The company employs less than 25 people.
- The company should not control another firm unless it is a qualifying subsidiary.
- Any other company should have never controlled it.
- The company should not have been a recipient of funds via the EIS scheme or other venture capital schemes.
A company based outside the UK can still qualify for the scheme, but only if it has an office or other establishment within the UK and offers services in the region.
As for qualifying trades, most are eligible for the scheme. However, there are a few that are not. If more than 20% of a company’s trade includes things like farming, coal or steel production, property development, banking or insurance, or running a hotel, it will not qualify for SEIS relief.
Check the government’s SEIS guidelines page for the complete list of excluded trades.
How to Check if You Qualify to Make SEIS Investments
If the tax treatment you can receive in return for making SEIS investments appeals to you, make sure you meet the eligibility requirements before speaking with SEIS-qualifying companies.
To qualify for the scheme, an investor must:
- Be an individual taxpayer in the United Kingdom and not a corporate entity.
- Not be employed or have any close relatives employed by the company.
- Not hold more than 30% of the company’s shares.
You should note that while regular employees are ineligible for the Seed Enterprise Investment Scheme, company directors are not.
How a Business can Apply for the Seed Enterprise Investment Scheme
Assuming your company performs a qualifying trade and meets all other qualifying criteria, it could be eligible for SEIS relief.
To apply, a company must provide specific information to the HMRC to apply for SEIS.
Some of the documents and information required include:
Financial Forecasts of the Company
These forecast how the company will perform financially and provide insights into its potential profitability.
A financial forecast submitted with the SEIS application should provide detailed financial projections for the next three years. It should also outline the company’s revenue streams and breakdown its expected expenditure.
Finally, it should clearly detail how the company will use the SEIS funds received from the scheme.
The Company’s Business Plan
This is a projected timeline of the company’s main objectives. It gives investors an insight into the company’s goals and how it hopes to achieve them.
A business plan should start with a brief summary of your business’s mission and vision. It should detail how the SEIS funds will be used to help it grow and break down its business model and sales strategy.
Additional Documents
You are also required to send additional documents as requested by the HMRC. For instance, you should declare details of any previous investments received from capital schemes.
Additional documents required include any shareholder’s agreements, Articles of Association and an Incorporation Certificate, employment contracts, and a Use of Funds statement.
To clear up the additional documents you may be required to send, check with the government’s website.
Make Sure Your Company Meets the Risk to Capital Condition
To qualify, your company must also be considered a risk for those who invest. It must meet the scheme’s risk to capital condition.
Meeting this requirement involves:
- Showing an intention to use the investment within three years to grow and develop its trade.
- Showing that the investment is a risk to the person who invested.
There should be a risk that an investor could lose more capital than they stand to gain.
Advance Assurance
Before filing an SEIS application, you can receive advance assurance from the HMRC. It is confidence from the HMRC that your company will qualify for the investment scheme.
It also allows you and a potential investor to have increased confidence about a potential investment.
To receive advance assurance, you must submit particular documents to the HMRC:
- The company’s most recent accounts.
- The company’s business plan.
- Details of how much you hope the business receives from an investment.
With advance assurance, you’re free to have new shares issued. They must be purchased in full and in cash and must be full-risk ordinary shares without preferential rights to your assets.
The next step is to complete a compliance statement for the shares issued. Again, you must send in a business plan and a copy of the latest accounts. You must also give details on how the business will use the investment.
Check the SEIS venture capital scheme page on the government’s website for a full breakdown of the documents and conditions required when sending a compliance statement.
If the application is successful, you will receive a letter of authorisation and a compliance certificate from HMRC. You should share these with the investor, as they’ll need these to claim tax relief.
Other Seed Enterprise Investment Scheme FAQs
What is the difference between SEIS and EIS?
Both aim to stimulate the UK economy by offering incentives for investors to invest in UK businesses. The SEIS is aimed at start-ups and smaller businesses, while money raised by the EIS helps medium-sized companies.
When can investors claim income tax relief?
Only once they have held EIS shares for at least three years. The income tax relief can be used for the current or previous tax year.
Can companies have EIS and SEIS investments at the same time?
Yes, but only if they qualify for both at given times. The SEIS would have to be raised first, and then the EIS is a potential opportunity further down the line.
