What is the Seed Enterprise Investment Scheme ?
The Seed Enterprise Investment Scheme (SEIS) was set up in 2011 by George Osborne to promote new enterprise and entrepreneurship, which in turn would help economic growth. It extends the existing EIS scheme by targeting smaller, higher-risk companies. The scheme helps newer startups appeal more to investors by offering them even more tax-efficiency – up to 50% of any income tax liabilities in the tax year of purchase (up to £100,000 per year), as well as relief on profits made at their sale (if held for 3 years and the income tax relief has been claimed). If the shares were sold before April 2014, then they even could get full tax relief on their sale (with the same conditions).
As a result of these significant tax reliefs, SEIS has become a common pre-requisite for investors looking at startups. This means that they are now becoming essential for startups to have in place. However, as always with HMRC, the rules and processes to qualify are complex.
To qualify as an SEIS investment, both the company and share issue need to meet certain conditions. The key ones are:
- The gross assets of the company should be less than £200,000 and it should have no more than 25 full-time employees.
- The amount a company can raise is capped at £150,000 over a three-year period.
- The company seeking investment must be based in the UK and have a permanent establishment in the British Isles
- The company must be no more than two years old.
- The company has to trade in an approved sector.
- The shares issued have to be ordinary shares, with full rights to dividends & voting. No restrictions can be applied.
- To qualify for income tax relief at 50% of the investment, the shareholder must not be connected with the company. You can be connected in two ways, both applying two years prior to the share issue, and three years following;
- By virtue of your employment – if you are an employee, director or partner
- By virtue of your financial interest – if you or an associate combined (business partner, relatives or your spouse) hold more than 30% of the voting rights of the company.
- All shares have to be paid up in full, in cash, when they are issued.
Applying for SEIS
The process for applying and getting approval for SEIS funding is protracted and complicated. You must provide a complete Compliance Statement, as well as a range of supporting documents, to HMRC. Failing to complete these correctly can result in serious consequences, as was the case in X-Wind Power Ltd.
After getting HMRCs sign off that their proposed fund-raising would qualify for SEIS relief, in September 2012, X-Wind Power received £90,000 from investors subscribing for shares, on the basis that they would receive 50% income tax relief. Six months later, they submitted a compliance statement to HMRC using form EIS1- this was a mistake as form SEIS1 should have been used. HMRC granted their approval, and the relevant certificates were given to investors. A year later, they tried to raise another round of funding through the SEIS scheme. HMRC denied this as EIS approval had already been given, and SEIS must be used to raise funds first.
In the case presented at the tax tribunal, it transpired that the relevant form had been prepared by the personal assistant of one of the company’s directors, who approved the form for signature by a second director before sending it to HMRC.
As the investment only qualified under the EIS scheme, rather than SEIS, investors could only claim 30% of their investment as tax relief, as opposed to the more generous 50%. The simple clerical error on using the wrong form resulted in a cost of £18,000 in lost tax relief to the investors – an error which was easily avoidable if they had consulted relevant professional advice.
To find out more about raising funds through the EIS or SEIS schemes, or if you are already looking at doing so, we would be happy to help – please see our services page for more details.