What is SEIS and how it benefits the investors in your company?
The Seed Enterprise Investment Scheme (‘SEIS’) is designed to help small, early-stage companies to raise equity finance by offering a range of tax reliefs to individual investors who purchase new shares in those companies. SEIS was designed to boost economic growth in the UK by promoting new enterprise and entrepreneurship. It complements the existing Enterprise Investment Scheme (‘EIS’) which will continue to offer tax reliefs to investors in higher-risk small companies. SEIS is intended to recognise the difficulties which very early stage companies face in attracting investment, by offering tax relief at a higher rate than that offered by the existing EIS.
Being SEIS registered makes your start-up extremely attractive to potential investors as for every £100,000 they invest with you, their tax bill reduces by £50,000
As an entrepreneur you get quite a few benefits of becoming SEIS compliant like:
Access to capital
Finding a UK bank willing to provide a start up loan to a small business post-2008 is difficult. Finding a loan with an interest that won’t potentially cripple the business within its first two years is virtually impossible. SEIS offers pure capital investment based on equity exchange, so no need to deal with banks.
SEIS has also linked up new businesses with investors that have contacts and expertise in the sector in which they operate. While this particular benefit isn’t officially part of the scheme, often investors will look for services they can personally add value to, and the start-up will usually benefit accordingly.
SEIS offers significant advantages for an investor paying income tax. And even more so if they have a capital gains tax liability and/or are contemplating their own mortality. Therefore it would be a struggle for a start-up without SEIS qualification to attract an equity investor. The good news is that the rules are pretty easy to satisfy. It may be helpful to consult an accountant, but broadly the criteria are:
· Less than two years of trading: this is the one that most often catches businesses out. The two years is at the time of the equity being purchased, so remember that a fundraise can often take months to complete. And trading means any kind of revenue activity, this could include your small experiment on a weekend market stall before you even registered the company.
· Less than £200,000 in gross assets and few than 25 full-time employees (or part-time equivalent) at the time of the share issue.
· A ‘qualifying trade’: most trades are qualifying, but some, such as some financial services and dealing in land & property development (including property intensive activities such as hotels or nursing homes) are excluded.
· To ensure that companies do not raise more money than they actually need in order to allow investors to obtain tax relief All the money raised from share issue must be spent by the end of the qualifying period. In most cases companies will have a business plan which makes it clear why the monies are needed, and how the company intends to use them for the business within the necessary timescale.
How to claim
· When the company you’ve invested in has been trading for four months or spent 70% of the total investment, the company must submit form SEIS1 to HMRC (or, more specifically, the Small Companies Enterprise Centre otherwise known as the SCEC).
· Once SEIS1 has been reviewed and the requirements met, the SCEC will issue a copy of form SEIS3 for every investor. These are sent to the company of they can be passed on to each investor for them to complete and submit as part of their tax return.
Please note that SEIS give lot of tax advantages to the investors and it is likely that it will be inspected from HMRC. It is important to prepare and file the correct forms and make sure that you meet all the criteria to qualify. In a recent case /X-Wind Power Limited v HMRC  UKUT 0290 (TCC)/ the Upper Tax Tribunal (UT) considered whether relief under the SEIS was blocked because the company filed an EIS (rather than SEIS) compliance statement in error. If in doubt, please get a professional help.
SEIS incentives investors to place capital into the high-risk start-up sector. By offering a selection of generous tax breaks, SEIS allows investors to offset the risk associated with start-up investment, while also being involved in a potentially successful new venture. An investor is eligible for income tax relief in respect of shares issued to him or her where particular requirements are met.
Requirements to the investor
The investor need not be UK resident but must have UK income tax liability against which to set the relief. The shares must be held for a period of at least three years from the date of issue for relief to be retained. If they are disposed of within that three-year period, or if any of the qualifying conditions cease to be met before the termination date for the shares relief will be withdrawn or reduced
Tax benefits break down:
- Income Tax Relief
Under SEIS, a taxpayer may invest up to £100,000 in a qualifying new start-up business and be eligible for income tax relief of 50 per cent. There are no exclusions to this tax break and it can also be spread across the current and previous year’s income tax bill. This is called a “carry-back” and it allows the investor to use any surplus income tax relief for the previous year if the current year’s income tax is reduced to zero.
2.Capital Gains Tax Exemption
As an added incentive to encourage more people to back ‘riskier’ companies, a capital gains tax (CGT) break is also offered for investments made into the new scheme:
- Capital gains may be reinvested in SEIS companies to obtain Reinvestment relief. From 2013/14 this relief is restricted to half of the gain in these years. In 2012/13 reinvestment relief was unrestricted.
Disposals of SEIS shares will be exempt from CGT after a three year qualifying period.
- If the SEIS investment makes a loss, an individual will also be able to offset the capital loss against income.
3.CGT Reinvestment Relief
If you have other investments separate from SEIS, and you decide to cash these in to reinvest in a project that qualifies for the scheme, your capital gains on these initial investments will be subject to a 50% reduction on tax.
If the chosen investment should fail, the government offer loss relief which can be offset against tax on other income. The loss relief is offset at the level of the individual’s highest income tax rate. The amount invested (minus 50% to take into account the income tax relief) is multiplied by the tax rate to work out the amount that can be claimed.
5.Inheritance Tax Relief
100% Inheritance Tax relief against the value of the shares is granted two years after the date of the initial purchase.