The Seed Enterprise Investment Scheme (SEIS) exists to boost investment in the UK’s start-up business sector. While there are inherent risks in investing in start-ups, the tax reliefs on offer are generous.
The Seed Enterprise Investment Scheme (SEIS) is largely modelled on the long standing Enterprise Investment Scheme (EIS), but offers enhanced tax reliefs for investment in smaller companies. The objective is to help start-up companies attract investment by offering tax reliefs to investors.
Importantly, tax relief is be available to directors investing in their own companies, subject only to the 30% test – they must not hold more than 30% of the ordinary share capital, issued share capital or voting rights in the company.
Additionally, in line with changes to the EIS, shares with preferential rights to dividends qualify for SEIS relief providing their amount and date of payment is not dependent on a decision by the company, the shareholder or any other person and providing the dividends are not cumulative.
The tax reliefs
Income tax relief is available at 50%, and the scheme offers 50% exemption from capital gains tax (CGT), on up to £100,000 of investment. The total investment tax reliefs can amount to 64% of the sum invested:
SEIS cash subscription
Income Tax relief at 50%
CGT re-investment relief at 14%
Net cost of investment
Any gain on disposal of SEIS shares will be completely free of CGT, provided the shares have been held for three years and income tax relief has been given and not withdrawn.
The shares should also be exempt from inheritance tax provided they have been held for two years.
SEIS qualifying companies
There are a number of conditions that a company must fulfil in order to qualify under the SEIS. These largely mirror the rules for EIS companies, except that SEIS companies must have:
- Fewer than 25 ‘full-time equivalent’ employees
- Gross assets of less than £200,000
- Must carry on a genuine new trade
- Not have raised any money under the EIS or VCT schemes.
SEIS and EIS/VCT Investment
If a company has issued shares to investors under the EIS or VCT schemes, then it cannot issue shares under the SEIS. However, a company which has issued SEIS shares can then go on to raise further investment from EIS and/or VCT investors.
This reflects the intentions behind the scheme – it is aimed at start-ups who need to be able to offer greater incentives to investors in their early growth stages. Once that is past, they should then be able to attract EIS and VCT money. The only requirement is that the EIS/VCT shares are issued at least one day after the SEIS shares.
The SEIS is intended to encourage investment in higher risk, trading companies, so a number of types of trade are excluded. As with the EIS, these are:
- Dealing in land, shares, futures and other financial instruments
- Dealing in goods other than in the normal course of a retail or wholesale trade
- Banking, insurance, money lending or other financial activities
- Leasing or receiving royalties or license fees, unless the company has created the intangible asset itself
- Providing legal or accountancy services
- Farming, market gardening, woodlands and timber production
- Property development
- Hotels and nursing homes
- The subsidised generation or export of electricity
- Coal and steel production, shipbuilding
- Providing services to a connected party conducting one of the above trades
- The subsidised production of electricity, gas, fuel or power.
Genuine new trade
The Company must carry on a trade which did not commence more than two years before the share issue, whether or not it was carried on by the Company or someone else at the outset.
Additionally, the company cannot carry on any other trade which is more than two years old – you can’t make an established company qualify for SEIS by starting a new trade.
Limits on sums raised
The maximum amount a company can raise from SEIS investment is limited to £150,000, but if the company has received any other State Aid such as grants, this may have to be deducted. There is no reason why a company cannot raise more than £150,000 from a share issue, but only £150,000 will qualify under the scheme.
The 30% test
SEIS relief is not available to an individual who possesses or is entitled to acquire more than 30% of the issued share capital, ordinary share capital or voting rights of a company or any subsidiary.
Holdings of business partners and relatives (excluding siblings) are added together for the 30% test. This test is a ‘once and for all’ test. An individual who holds or has held more than 30% cannot qualify for SEIS, even if a new share issue dilutes their holding below 30%.
The only exception to this is that an individual is not disqualified if he holds more than 30% at a time when the company has not issued any shares other than subscriber shares, and the company has not begun to trade or make preparations for carrying on any trade or business.
How does my company obtain SEIS qualifying status?
Many potential investors will want some form of comfort that their investment will qualify for the SEIS tax reliefs. No guarantees can be given, particularly as the company has to satisfy certain requirements for three years after the share issue.
However, it is possible to obtain ‘advance assurance’ from HM Revenue & Customs before offering shares to investors, and many potential investors will insist on this. Advance assurance is not a requirement of the SEIS, and does not guarantee that a share issue will qualify, but it is useful, both in attracting investors and in ironing out any problems before it is too late.
How can we help?
BDO’s Venture Capital Tax specialists provide a full range of expertise, covering both tax reliefs for investors and guidance to companies seeking investment. For more information, please contact your usual BDO contact or David Brookes, Tax Partner, on 0118 925 4445 or email [email protected]