Seed Enterprise Investment Scheme (SEIS)
The Seed Enterprise Investment Scheme (SEIS) is managed by HMRC and is designed to provide tax relief to investors who buy shares in early-stage companies. This is attractive to SMEs because it doesn’t cost them anything – but it does make the investment proposition more appealing for potential equity investors.
The SEIS is a government venture capital scheme that provides tax relief to investors who buy shares in small, early-stage companies. Complementing the Enterprise Investment Scheme (EIS), the aim of the SEIS is to encourage investment in small companies that are less than three years old.
The SEIS scheme, which compliments the Enterprise Investment Scheme (EIS), aims to encourage investment in small companies that are less than two years old.
As the scheme is so generous to participating investors, it’s designed only for high-growth, higher-risk companies. We’ve set out below which companies are eligible to raise finance under the SEIS tax relief scheme. We outline the rules that must be followed for an investment to qualify for the relief, as well as detailing the HMRC procedures that companies must follow.
SEIS rules and requirements are complex and appropriate professional advice should be taken before issuing shares or committing to any investment.
SEIS at a glance:
Tailored for startup-stage companies seeking initial capital, SEIS offers the most generous tax incentives available to UK investors, making it a key driver of early-stage entrepreneurial funding. It is often the first step for startups before they later qualify for EIS.
How Your Start-Up Can Benefit from SEIS
A company may issue shares for a cash investment of up to £250,000 under the SEIS scheme, which it may use for a wide range of business purposes, everything from research and development to recruitment of more staff as long as it deemed growth activities.
There are some rules around what type of company qualifies for SEIS investment. While there is no guaranteed way to make sure an investment will be eligible for the SEIS, companies can apply to HMRC for SEIS ‘advance assurance’. That assurance gives a provisional indication of whether or not a company may be eligible to apply for tax relief for its investors.
HMRC requires that all the monies raised by the share issue must be spent on qualifying business activity within three years of the share issue.
The SEIS scheme doesn’t give the Company any direct benefits, the benefits are instead mainly directed to the investors (including Angel investors) and to attract investors to invest into start-ups.
As with the EIS scheme, there’s no capital gains tax to pay on profits, no inheritance tax, and you can claim loss relief in the same way.
The principal types of tax relief are described below.
Income Tax Relief
Investors may recover 50% of the cost of the shares, up to a maximum of £200,000 each tax year.
The relief is deducted from the investor’s tax liability, providing there is sufficient tax liability against which to set it and would be submitted through the investors individual tax return.
Capital Gains Tax
If the investor has received income tax relief on the cost of the shares, and the shares are sold after they have been held for at least 3 years, any profit is completely free from Capital Gains Tax.
Loss Relief
Investors are eligible for up to 50% income tax relief on their investment, with the current limit set at £200,000 per year.
In the event of an unsuccessful investment, the government provides loss relief, which can be used to offset tax on other sources of income.
Capital Gains Reduction
If an investor decides to liquidate other investments to support a SEIS-qualified venture, the capital gains on the original investment are eligible for a 50% tax reduction.
Overall, SEIS aims to make investing in smaller and higher risk companies more attractive and financially viable for private investors.
Qualification conditions
How to Qualify for SEIS
There are many “trip-wires” that the company seeking investment (and its directors) must avoid in order to qualify for SEIS. Here are some of the more obvious ones:
- The company must be established in the UK
- A company cannot receive more than £250,000 in total under the scheme.
- The equity investment must be for ordinary shares in the company.
- The company must be in a “qualifying” industry.
- It must have no more than £350,000 in gross assets at the time of the share issuance
- Any trade being carried on by the company at the date of issue of the shares must be less than three years old.
- The company must not have carried on any other trade before it started to carry on the new trade.
- It must have fewer than 25 employees.
- The company should not control another firm unless it is a qualifying subsidiary
- The company must not have received investment from a Venture Capital Trust or under the EIS tax scheme.
- The company must be unquoted at the time of issue of the shares
Companies based outside the UK can still qualify for SEIS if they maintain a permanent establishment in the UK.
Eligibility conditions
How to check investor eligibility for SEIS
Before engaging with potential investors, it’s crucial to ensure they meet the eligibility requirements for SEIS.
An eligible investor under SEIS must:
- Be an individual, not a corporate entity.
- Be a taxpayer in the UK.
- Not hold more than 30% of the company’s total shares. Any more would be considered a ‘substantial interest’ by HMRC and disqualify them from SEIS.
- Not be an employee of the company or have a close relative employed by the company.
It’s important to note that while employees of the company are not eligible for SEIS, company directors are not subject to this restriction.
Finally, please remember that SEIS relief is only applicable to ordinary full-risk shares. Shares that come with additional rights are not eligible for this scheme.
After SEIS
What Happens After Your Seed Investment?
Under the SEIS-incentive scheme you can only raise £250,000. Many businesses will need to raise much more investment to take their company through the development stage and a market launch.
For these investments you will need to use another scheme similar to the SEIS-scheme, the Enterprise Investment Scheme – EIS.
SEIS specialist accountants
Metric has supported businesses over the last 15 years with their SEIS application and gained an extensive experience in the complexity of the SEIS rules.
We can help you review your business and ensure that you are set up for a successful application. Our strongest recommendation is that you seek help from a professional SEIS specialist as early in your investment process as possible. That way we can at an early stage identify any issues that you may have.
Our SEIS process typically involve the following steps
Advance assurance
We’d always recommend that the initial step is to seek advance assurance.
Whilst not required, it’s sensible for any company that intends to issue SEIS-compliant shares to obtain advance assurance from HMRC. This process can take circa six weeks but does provide comfort to the would-be shareholders that any investment would qualify for SEIS.
In order to understand your business, we would set up a kick off meeting to discuss your Company and your particular circumstances and identify any potential issues. Thereafter we will provide you with a list of items that we will need you to provide us in order for us to complete your advance assurance application form. We will also prepare a letter accompanying the application form that sets out any information that HMRC may need to provide the Company with an advance assurance.
Obtaining the funds and share issue
Ahead of receiving the investment the company director must first ensure that they are legally able to issue new shares as per their Articles of Association.
It may be that they first need to pass a resolution and may need to hold a board meeting to seek approval for the proposed share issuance. When the Company has received the funds to their bank account the shares can be issued and recorded at the Registrar (Companies House) on the SH01 form(s).
Metric can support with both the SH01 and to provide investors with their share certificates. There are some commonly mistakes when receiving funds that can be avoided and that would reduce accountancy fees. Firstly, try to obtain all the investment funds over a few couple of days to avoid having shares allotted on many different dates
Apply for SEIS certificates
After the company has been trading for 4 months or spent 70% of the “SEIS funds”, the company directors may submit the SEIS1 (or compliance statement) to HMRC and seek SEIS certification on behalf of the investors.
Once the certificates are received, these just need to be signed by a director and shared with the investors. We always recommend the Company to keep a copy of these in case there are some questions or due diligence at a later stage, as if the individual lose the SEIS certificate it can be hard to replace them without a copy.
If the business hasn’t obtained an advance assurance HMRC will require more documentation and information at the time of the SEIS1 submission in order to decide the eligibility of the investment.
