Step by step guide to SEIS and EIS tax relief for investors

It is established tax law that the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) provide very generous tax savings for investors (see FAQ 1). In a nutshell, tax relief is given to investors twice – upon subscription and then again upon disposal.

The question we are asked most frequently is “how do I secure SEIS and EIS approval for my investors”? We set out the steps for you below:

Step 1- Is the trade eligible for SEIS and/or EIS tax relief?

Not every trade will qualify.  However, some trades will qualify if presented to HMRC in the correct fashion.  The position can be tricky to navigate.  Take “fintech” for example.  The development of the software is a qualifying trade whereas banking and finance is not. There are de-minimis exceptions.

If you are not sure whether your trade will qualify, speak to us as we do approach HMRC where the matter is “grey” to see if we can gain approval – see below for details relating to the advance assurance service HMRC offer.

Step 2 – Does the company qualify for SEIS and/or EIS?

The rules differ slightly between SEIS and EIS.

For SEIS, the Company must:

• Have been trading for less than 3 years
• Employ fewer than 25 people
• Have no more than £350,000 in gross assets
• Be UK owned or have a “permanent establishment” in the UK
• Meet the “risk to capital” condition.

For EIS, the Company must:

• Have been trading for less than 7 years
• Employ fewer than 250 people
• Have no more than £15 million in gross assets.
• Cannot be a subsidiary of another company (where that other company holds more than 50% of the shares in the company)
• Not raise more than £5 million in total over a 1-year period.

Step 3- Advance assurance service offered by HMRC.

Advance assurance is confirmation from HMRC that an investment in the business is likely to qualify for SEIS and/or EIS tax relief. HMRC advance assurance provides comfort for investors and is more likely to make them want to invest. It is not compulsory to seek advance assurance, but we would recommend it- and indeed most of our clients take this step.

We can help you with the advance assurance application. We can vet the documents before you send them to HMRC giving you the best chance of securing advance assurance for your business plan.  HMRC will be looking at:

• A business plan with detailed financial forecasts. The business plan should be persuasive (you may want a separate “pitch deck”), while also covering how investment will meet and overcome the “risk to capital” condition.
• The latest set of company accounts.
• The Company’s Articles, the Shareholders’ Agreement, any Investment Agreement.
• Details of previous investments and or grants.
• The Register of Members and Share capital table outlining any dilution to be suffered upon investment. We can help you prepare these technical documents.
• Whether you are seeking SEIS and/or EIS advance assurance

HMRC have also produced a SEIS “Advance Assurance Checklist” which we can send to you if you ask.  It is designed to make sure you don’t miss out any important information in your application.

Step 4- Issue the SEIS and/or EIS shares to investors.

Once HMRC has granted your company HMRC advance assurance, if you have applied for it, you can issue your S/EIS shares. You can also issue your S/EIS shares if you didn’t obtain HMRC advance assurance. The shares must have been paid for in full by your investors before you issue them. We often see businesses trip up on the timing.

The shares must also meet certain conditions to qualify. They must be:

• Ordinary, non-redeemable shares.
• Have no preferential rights as to assets in a winding up and limitations on preferential rights to income.

You cannot raise more than £250,000 through SEIS- however you can secure additional later funding through EIS (see FAQ 4 below).

Step 5- Report the issue of new shares to be used for SEIS and/or EIS to Companies House

Once you’ve issued your SEIS shares to your investor(s), you will need to report the issue of shares to Companies House and deal with the PSC report if appropriate (see FAQ 6).

Step 6 – Issue share certificates to investor(s)

Your investor(s) will need SEIS and/or EIS share certificates so that they can claim their income tax relief. Investors can get angry if they take the risk on investment and then cannot secure the tax relief they were expecting.  The steps are:

• Complete the SEIS1 compliance form and send this to HMRC. This can now be done online
• When HMRC receives your SEIS1 form, they will send you an SEIS2 in return, by email, which contains your SEIS2 authorisation number.
• Use the authorisation number as well as other information to complete the SEIS3 compliance certificate for each investor. You will need to fill out one for each investor.

Once your investors have received their certificates, the process is complete!

Frequently Asked Questions (FAQs)

1: What is the tax relief offered for investors?

SEIS

Once you have received your shares, you can claim Income Tax relief on the tax year you make the investment or the tax year before you make the investment (if you choose to treat some or all of the investment as being made in a previous year). You can invest up to £200,000 per year in SEIS-eligible companies each tax year, and claim up to 50% of this back through Income Tax relief.

When you sell your shares, you’ll pay no Capital Gains Tax on any profits. As long as:

• You held the shares for a minimum of three years.
• You received Income Tax relief on that investment which has not been reduced or withdrawn at a later date.

Furthermore, if you sold an asset and used all or part of the gain to invest in a company that qualifies for SEIS, you can reduce your initial Capital Gains Tax liability by up to 50%, up to a total of £50,000. You must also claim Income Tax relief on the investment. You don’t necessarily have to sell the initial asset before you invest under SEIS, but if you do, the asset must be sold in the same tax year that you claim Income Tax relief.

EIS

Under EIS, you can invest up to £1 million in EIS-eligible companies (this increases to £2 million if at least £1 million is invested in knowledge-intensive companies) and claim up to 30% of this back through Income Tax relief.

As with SEIS, when you sell your EIS shares you will pay no Capital Gains Tax on the profits (as long as you follow the same conditions).

If you sell your EIS shares at a loss, you can choose to set the loss amount (minus any Income Tax relief already given) against your income.

Furthermore, if you sell any asset and owe Capital Gains Tax, you can defer some of the amount due if you invest the gains in a company that qualifies for EIS.

2: What is a qualifying trade?

The money raised by an S/EIS share issue must be used for a qualifying trade. One problem our clients often find is HMRC’s list of qualifying trades is outdated. New technologies can bring what would have been trades that do not qualify into qualification. Check HMRC’s full list of excluded activities to make sure your Company doesn’t fall under one of them.

Most Companies will be regarded as carrying on a qualifying activity for S/EIS purposes if:

• The trade is conducted with a view to a profit; and
• Does not to any substantial extent included any “excluded” activities.

If you consider your trade might be in a grey area, you can apply to HMRC for advance assurance to check your proposal will qualify. There is no cost charged by HMRC for the service, and they tend to process applications within a month.

3: Can I invest in my company if I am also a director of the company?

It is often the case that the founders of a Company want to invest as directors. However, there are certain rules to be met to secure SEIS/EIS tax relief.

SEIS

Employees are unable to benefit from SEIS. You can invest as a director. You’ll be considered a director if you “occupy the position of director by whatever name called and any person in accordance with whose directors or instructions the directors are accustomed to act”. It also includes any person who owns or controls not less than 20% of the ordinary share capital of the company and/or is a manager of the company or otherwise concerned in the management of the company’s business. While the most obvious way to show this is registering yourself as a director at Companies House, you do not need to be registered (however, if you were issued a letter of appointment this would be useful evidence). Unlike EIS, you can be a paid director and obtain SEIS relief.

EIS

Under the EIS rules, directors can qualify if they are unpaid or if they are paid they meet the Business Angel requirements. The director must be appointed as director after their investment. There are detailed rules around what qualifies as remuneration, and we would be happy to discuss this with you further.

It may be useful to have these points covered by a director’s service agreement. This allows the Company to outline the position clearly, and for the director to know how he can benefit from EIS before he joins the Company.

4: What if I want EIS and not SEIS?

While EIS grants your Company access to greater funding opportunities, we would suggest you raise money through SEIS (and issue your shares) first. This is because the SEIS rules are clear: no SEIS after EIS. Once you issue EIS shares, you can never raise SEIS after that.

Raising money through SEIS is great to get your Company off the ground- and if successful, you can then raise further funds from the same happy investors in the form of EIS.

5. How to issue shares

When issuing your shares, you will need to fill out a form, SH01, and file it at Companies House. You will also have to update your companies Register of Members, to show all the new shareholders and their respective shareholdings (how many shares each of them now have).

The issued shares must be ordinary and non-redeemable. They cannot have any preferential rights as to assets on a winding up and limitations on preferential rights to income. If they do, your investors will lose their relief.

6. When do I need to file a PSC

Depending on the number of shares, and percentage this is overall, held by an individual investor, the Company might need to update its register of Persons with Significant Control (PSC). Any changes are legally required to be notified to Companies House. The PSC register should be updated 14 days after the changes to the PSC register are confirmed.

For both SEIS and EIS, you cannot have more than a 30% stake in the company. However, if you have 25% or more of the shares in the company, you will need to register this interest on the PSC register.

7. Protecting your trade

Having achieved your SEIS and/or EIS investment, your investors are likely to want to see the trade protected as far as is practical. A snapshot is set out below.  We can help you tailor agreements to fit your actual needs. One of the advantages of working with us is that we have the depth of expertise now found on platforms offering only the basics.

We assist you with the following protections:

• IP registration- if the company owns any intellectual property, we can assist with registering a Trademark or Copyright. This will stop any of your products being infringed upon by competitors.
• Commercial agreements- many investors often want Shareholder or Investor agreements. These will set out the rights attached to the investors shareholding in the company. Although investors may not have an involvement in the day-to-day running of the company, they may wish to retain a veto right over certain decisions to protect their investment. We can help you draft these agreements.
• Bespoke articles- most companies are incorporated with the model articles. These do not contain any of the essential commercial provisions that our clients want. We can assist you with drafting a bespoke set of articles to suit your business needs, and protect your interests.