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So, you’re a startup and you’ve bootstrapped your idea for the first few months. You now have the building blocks ready, but you need investment to make it happen.
Unfortunately, a few years ago, that was as faras many would-be companies reached. The perceived risk of investing in such an early stage company were considered to be too high by the typical investor and too early to attract Venture Capital investment.
That’s why the tax break, the Seed Enterprise Investment Scheme (often referred to as “SEIS”) was introduced, to make it easier for small, early-stage companies to raise funds by providing very generous tax relief to investors who take risks on these very early stage ventures.
How does SEIS work?
SEIS allows investors to collectively invest up to £150,000 in a limited company that is under two years’ old. There are certain industries that are excluded from SEIS, but most goods and service industries do qualify.
There are certain rules that investors have to comply with. Investors may invest up to £100,000 per year into SEIS investments and may not control more than 30% of the company.
If a company wants to raise more than £150,000, then it can use another (slightly less generous) tax break – the big brother of SEIS –the Enterprise Investment Scheme (or “EIS”), which allows a company to raise up to £5 million per annum.
Summary of tax reliefs offered to investors through SEIS
SEIS offers a number of tax reliefs to investors ranging from automatic reductions to loss relief and capital gains avoidance. Some of these are dependent on your tax bracket so you’ll need to be aware of that.
- Income tax relief of 50% of the amount invested with the potential to split the relief between the tax year of your investment and the previous tax year.
- Exemption from Capital Gains Tax (“CGT”) on the earnings from your shares so long as you have held them for a minimum of three years. Alternatively, an investor can receive CGT of up to 50% of the profits if you sell within three years and reinvest the profit into other SEIS companies.
- Loss relief in the event that the company fails. The amount you receive in loss relief is equal to your investment minus the 50% you received back initially.
IMPORTANT – 6 practical steps for companies using SEIS
There are certain pieces of advice I would give to any company considering using SEIS (or EIS):
- Seek pre-approval. Obtain “pre-approval” from HMRC. Whilst not compulsory, this gives the investors confidence that they will indeed get the tax breaks that these schemes offer. Having pre-approval gives you an advantage against any competitors and can reduce the time of finding the investment you are looking for. Plus, if HMRC issues a pre-approval notice incorrectly they are required to honour it.
- Start the process early. It takes circa 45days for HMRC to consider/draft/issue a pre-approval letter and it will likely take a few days to pull together the necessary supporting information to complete the request, so you’re looking at close to two months. The sooner you start, the better.
- Get expert advice. There are so many hurdles to be aware of with SEIS (and EIS) that can trip you up. Ensure you get the right advice before collecting cash from investors, issuing share certificates, etc.
- Get a shareholders’ agreement. Don’t expect others to feel the same passion about your business as you do. At the end of the day, this is an investment, where the aim is to make money. Having a shareholders’ agreement can avoid problems later.
- Make use of SEIS while it lasts. Having reviewed the recently issued manifestos of all the main parties, not one has confirmed that they will definitely be retaining tax breaks such as SEIS (or EIS) in the next parliament. Therefore, make the most of it while it’s in existence.
- Keep a track of the funds used. In order for a company’s investors to claim the tax break, the company must be able to demonstrate that it has used at least 70% of the funds invested. In order to make this easier to track, we suggest you set up a separate bank account for the investment (and prioritise using these funds).