SEIS: Seed Enterprise Investment Scheme
- Helen Curtis
- Updated: Wed, 28th Dec 2016
The HMRC approved Seed Enterprise Investment Scheme (SEIS) offers investors in UK start-ups generous tax reliefs. We work with the investors and the companies seeking investment. An advantage of working with us is that we offer the full range of support you need ranging from technical analysis of SEIS, obtaining HMRC approval through to providing the investment documentation.
Our services for SEIS include:
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 and defer payment of a flat fee of £5,000 until you have received £50,000 of investment.
SEIS: The attractions
The SEIS scheme is rapidly gaining traction. Latest statistics published by the Government 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.
We provide a one stop service that comprises:
- HMRC clearance;
- Taxation advice;
- Intellectual property protection;
- Thus ensuring the SEIS scheme works for you.
Removing the stress of failing your investors by failing to secure SEIS approval from HMRC
Applying and obtaining HMRC clearance for SEIS relief is daunting. We have the experience. Our fees are sustainable and we aim to build a long term relationship with you. To further reduce costs and avoid delays, it is important to provide the correct information to HMRC, in a coherent format, at the outset.
SEIS targets smaller start-ups which frequently have difficulty raising funds. SEIS qualifying requirements are similar to EIS relief requirements.
- Shareholder rights: especially anti-dilution provisions. We review the corporate documentation – mainly the shareholders agreement and articles of association;
- Ability to obtain EIS relief in the future.
Investor’s tax reliefs
The key tax reliefs 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.
We work with investors in weighing up whether to invest under SEIS or under the Investors Relief regime.
Company requirements for SEIS relief
The company qualification requirements for SEIS are similar to those for EIS. The main differences are:
- 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 ongoing requirement for the company and the shareholders to inform HMRC if anything occurs which could cause the relief to be reduced or removed.
The requirements for the founders include:
- The founder or any single investor should not hold, or have held, over 30% of the equity at any time. However, there is a very narrow exemption for subscriber shares prior to any company activity.
- The company must be independent, i.e. not controlled by another company. We check the shareholders from the date of incorporation. However there is a narrow exemption for “off-the-shelf” companies.
Seed Enterprise Investment Scheme relief is only available if the company undertakes a qualifying trade. A qualifying trade must:
- be conducted on a commercial basis with a view to making profit;
- not be an excluded trade.
The company must spend all monies raised on this qualifying trade within three years. If your company plans to spend this raised money after three years, we suggest delaying the investment.
Individual investors are responsible for complying with the Seed Enterprise Investment Scheme relief requirements. Nevertheless, we check that each investor, to the knowledge of the company, will comply.
Implementation of SEIS investment
Once we are sure relief should be available, we discuss how best to structure the company’s shareholding. 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.
We draft all of the documentation needed to implement SEIS including:
- Articles of association;
- Share certificates;
- Board resolutions;
- Submissions to HMRC (see below); and
- Filings at Companies House.
Submissions to HMRC
Besides structuring the corporate documents, we resolve a minefield of HMRC forms required to give investors SEIS relief. There is the:
- SEIS AA,
- and finally, SEIS3.
Pitfalls under the SEIS scheme
HMRC sets out strict guidelines to ensure only genuine investors in genuine start-ups can benefit. It is easy to make mistakes and lose SEIS tax reliefs, for instance:
SEIS investors don’t pay for shares before they are issued
This is a common reason for failure: shares are issued to investors who have not paid for them. The requirement is that the shares are fully paid. This often happens when the company registers an SEIS investor as a shareholder on incorporation – issuing the shares immediately. However, since the company has not yet established a bank account, as the company first needs to be incorporated before opening a bank account, the shares may not yet be paid for.
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. The trick to avoid this risk, and the non-payment of shares risk, is to have a non-qualifying founder incorporate the company. Then, at a later date, issue investor shares to all investors at once after receipt of payment for the shares.
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. Investors are therefore advised to look carefully at the makeup of the other shareholders in the company.
Investor wants preference shares
Investors naturally look out for their own interests and might request preference shares. Nay, nay and thrice nay. The shares must be full risk, ordinary shares. If the company is wound up, the investor must be entitled to the same interest as every other ordinary shareholder. At best, the investor can negotiate preferential rights to dividends.
Taking on a new shareholder
Your company might initially welcome the new investment. However, the existing shareholders should note that this SEIS investor will be a shareholder. This new investor has rights.
The solution is a carefully worded shareholder’s agreement that includes for example drag-along rights. The existing shareholders might not want to miss out on the sale of the business to a purchaser looking to acquire 100% of the shares, drag-along rights protect this.
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.
Please do get in touch with us to discuss SEIS investment. We can help you if you are the company seeking investment or if you are an investor considering an SEIS investment. We are practical and deal with all aspects relating to qualification for SEIS, tax reliefs for investor and the business contract documentation including articles and the shareholders agreement. We also handle the HMRC clearance process for you.
Many great businesses started out under SEIS. We work with start-ups and investors to secure the full benefit of these generous tax advantages. Why not call or email me to arrange an informal discussion.