- Veronika Lipinska
- Updated: Wed, 10th May 2017
The HMRC approved Seed Enterprise Investment Scheme (SEIS) offers investors in UK start-ups generous tax reliefs. We offer expertise for the entire process from technical analysis on how to qualify for SEIS, obtaining HMRC approval through to providing the investment documentation for the share issue under the Seed Enterprise Investment Scheme.
Our services for SEIS include:
SEIS is aimed at start up companies. HMRC recognises the risks are greater and therefore offers more generous tax reliefs than it does under EIS. EIS investment limits are higher but the tax relief is lower. Many businesses start off with SEIS and then move onto EIS once they are more established.
Seed Enterprise Investment Scheme starter package
We offer starter packages for the SEIS advance assurance process starting from £900 plus VAT if no articles or shareholders agreement are required; or £2,200 plus VAT for companies that do require bespoke articles or a shareholders agreement.
We also offer a “no-win, no-fee” type arrangement, where we will process the advance assurance with HMRC for the Seed Enterprise Investment Scheme but defer payment of a flat fee of £5,000 until you have received £50,000 of investment.
We come across many companies who have promised their investors SEIS tax relief but then find that the shares do not qualify. HMRC does not make it easy and the rules can be intricate. We have secured SEIS assurance from HMRC for many clients across many sectors over the years. Our work has given us the expertise help you remove stress and uncertainty.
Why investors choose SEIS
The Seed Enterprise Investment Scheme is rapidly gaining traction.
SEIS – the popularity
Latest statistics published by the Government relating to the Seed Enterprise Investment Scheme indicate:
- Since 2012 4,775 companies benefited from £433 million of SEIS funds.
- In 2014-15 £175 million raised in SEIS funds alone.
- 56% of companies raised over £50,000 in 2014-15.
- Around 72% of SEIS funded companies were in the high-tech, business services, distribution, restaurant and catering sectors.
- 1,800 companies who raised £152 million through SEIS, raised funds for the first time in 2014-15.
Issues we resolve for investors into a SEIS business
We look at:
- Shareholder rights: especially anti-dilution provisions.
- The corporate documentation – mainly the shareholders agreement’ and articles of association.
- We look to see how you will dispose of your investment in the short, medium and long term;
- The ability to obtain EIS relief in the future.
Seed Enterprise Investment Scheme investor’s tax reliefs
The key tax reliefs under SEIS for the investor are:
- Upfront income tax relief of 50% up to an annual limit of £100,000 on qualifying shares held for more than 3 years;
- Note it is possible to work around the 3 year holding rule, if the shares are sold sooner. The trick is to reinvest the proceeds.
- No capital gains tax on eventual disposal;
- Relief for losses against income, less the income tax relief given on the initial investment;
- An exemption from capital gains tax of half of realised gains re-invested in a SEIS company;
- Investors may elect to carry back income tax and capital gains tax relief one year to maximise tax reliefs.
- The investor cannot be a company employee, although they can be a director.
Seed Enterprise Investment Scheme trading requirements
HMRC does lay down trading requirements for companies to qualify for SEIS. Some of the basic requirements include:
- The gross assets of the company must be less than £200,000 directly prior to the allotment of the new shares;
- The business must be less than two years old;
- The company must have fewer than 25 employees;
- The company must not raise more than £150,000 through SEIS.
- There is an on-going requirement for the company and the shareholders to report to HMRC any developments impacting on SEIS.
Seed Enterprise Investment Scheme – successful implementation
There are stumbling blocks involved in implementation. Often problems only come to light once investors have subscribed for shares thinking they can claim SEIS tax relief.
Some of the most common stumbling blocks we can help you address include:
Trade off for founders and investors
There is always a balance between:
- The founders wishing to retain full control; and
- Attracting investors, who add value beyond their money.
We discuss what protections the founders could offer investors. Most founders don’t want investors unduly interfering in the day-to day company management. Also, we consider the long-term implications of taking new minority shareholders on board.
Payment for SEIS shares
This is a common reason for failure under the Seed Enterprise Investment Scheme. SEIS legislation requires that shares are issued only to investors who have paid in full. Sounds simple, but problems arise where there is delay in opening bank accounts.
Investor holds more than 30% of the shares
An investor may accidentally temporarily hold more than 30% of the shares, because of delays in issuing shares to other investors. There are some tricks you can use to avoid this risk.
30% shareholding threshold breached by “associates”
This 30% threshold can also be accidentally breached as the shareholding of “associates” is taken into account. If business partners, trustees or certain close relatives (spouse, parents, children, grandchildren) of an investor choose to invest in the same company and the total shareholding of the investor plus the associate exceeds 30%, the benefits of SEIS are lost.
Investor wants preference shares
Investors naturally look out for their own interests and might request preference shares. A preference will cause the loss of tax benefits under the Seed Enterprise Investment Scheme. The shares must be full risk, ordinary shares. If the company is wound up, the investor must rank equally with other shareholders. At best, the investor can negotiate preferential rights to dividends.
Failing to address shareholder rights
HMRC do not object to standard articles downloaded for free when the company was incorporated. However, shareholders are unlikely to be properly protected. Basic rights that can enable the sale of the company, such as drag and tag rights, are not included with standard articles. Problems are solved via the use of bespoke articles and or a shareholders’ agreement.
SEIS Seed Enterprise Investment scheme examples
Consider the following scenario: Thinking Big Ltd is a UK resident company in the creative industries. The company seeks investors to ‘kick start’ a new business venture. The company currently has:
- 23 employees
- £100,000 of assets
- 18 months trading.
Thinking Big Ltd wants to raise £150,000 and has not raised any other funds. Will Thinking Big Ltd qualify for SEIS?
Answer: Thinking Big Ltd should qualify for SEIS because:
- The company is UK resident; and
- The trade qualifies. In general most trades will qualify other than ‘excluded activities’ listed here.
- It does not employ over 25 employees, or part-time equivalents, at the date the new shares are issued.
- It has less than £200,000 in gross assets prior to the investment;
- The company has not been trading for more than 2 years at the date of issue of the shares; and
- The investment sought is less than £150,000, which is the maximum per company.
- The funds raised must be spent on the qualifying business activity within three years of the share issue.
Relief for investors is only available once 70% of the monies have been spent or the business has been trading for 4 months.
Companies may apply to HMRC for advance assurance and must submit a formal compliance statement.
SEIS relief from an investor’s perspective
Mr Vestor wants to invest £100,000 for 25% of the equity in ordinary shares, and an employee wants to invest £50,000 for 12.5% equity. Can Mr Vestor obtain SEIS tax relief on his £100,000 investment? Most likely yes because, he is:
- Obtaining no more than 30% equity.
- Not an employee.
- Subscribing to ordinary shares.
- Not connected with as an “associate” e.g. spouse or other relative who also holds Thinking Big shares.
Can the employee invest? Most likely “no” because:
You cannot get tax relief under the SEIS scheme if you are paid a salary at anytime from three years commencing on the date of the share issue.
However, the employee could obtain tax relief on his investment if he were instead to utilise the EMI scheme.
A director’s investment may, however, qualify for SEIS relief if s/he holds no more than 30% equity.
SEIS tax relief – what is it worth?
Mr Vestor will receive a 50% reduction in income tax on his £100,000 investment, which is the maximum available per annum. After three years, Mr Vestor could be eligible for capital gains tax exemption when he disposes of his shares, as long as he remains a qualifying investor.
If Mr Vestor has realised chargeable gains in the current tax year, these may be permanently reduced by 50%.
Illustration of SEIS tax relief on sale for £200,000 in four years
Investors and companies must plan and execute the investment transactions with care. Otherwise you can inadvertently lose the relief if the statutory conditions are not met. If managed correctly, Mr Vestor’s tax relief under SEIS based on the current legislation would be:
On subscription: income tax relief £100,000 @50% = £50,000
On re-investment following sale: Capital gains tax re-investment relief £100,000 @ (say) 20% x ½ = £10,000
On sale: Capital gains tax saved on disposal £200,000 – £100,000 @ 10% = £10,000
Maximum tax saved on initial investment of £100,000: £65,000.
A final note of caution to any potential SEIS investor. The greatest tax reliefs are never going to equal more than the sum invested. If the company fails, the investment may be worth nothing at all.
We work with start-ups and investors to secure the full benefit of these generous tax advantages. Many of our successful clients started out under SEIS. If you have a query please get in touch.