For a business start-up seeking early stage investment capital, the Seed Enterprise Investment Scheme (SEIS), is an invaluable tool in attracting investors.
Under SEIS, the company issues shares in return for an investment against which the investor can normally claim tax relief of 50% of their funding. Usually, these shares have a limited lifespan which has to be a minimum of three years.
The company is restricted to borrowing £150,000 in total including any State Aid that it receives.
However, for the investor to be able to claim and keep the tax relief, the company must meet a set of conditions. These conditions split between those that:
- apply only at the time the shares are issued
- must be met continuously, either from the date of incorporation or from the date of the share issue to the third anniversary of their issue.
- apply to how the company must use the monies it has raised.
Requirements At The Time Of The Issue Of The Shares
- The company must not be quoted on the London Stock Exchange or any other recognised stock exchange. Under SEIS rules, the Alternative Investment Market and most PLUS Markets are not considered to be recognised exchanges.
- It must have fewer than twenty-five employees in total. If the company is the parent company of a group, this figure applies to the whole group.
- It must have no more than £200,000 in gross assets. Again, if the company is the parent company of a group, this total applies to the whole group.
- The company cannot not have received any funding from a Venture Capital Trust or under an Enterprise Investment Scheme.
- The trade being carried on by the company must be less than two years’ old at the date of the share issue. This time limit is either from when the trade was initiated by the company or started by an individual who subsequently transferred it to the company.
- The company must not have undertaken any other trade prior to starting the trade for which it is seeking funding.
Requirements To Be Met Continuously From The Date Of Incorporation
- The company must not be controlled by another company. However, since 6th April 2013, any ‘on-the-shelf period’ would be ignored. This being a period during which the company had only issued subscriber shares and had not yet begun or prepared to begin trading.
- It must not be a member of a partnership.
- The company may have subsidiaries. However, the company must have more than 50% of the ordinary share capital and the subsidiary cannot be under the control of another company through an alternative mechanism.
- The company may not control another company that is not a qualifying subsidiary.
Requirements To Be Met Continuously From The Date Of Issue Of Shares
- The company must be either United Kingdom resident or have a permanent establishment in the United Kingdom.
- If a single company, it must exist solely for the purpose of carrying on a qualifying trade.
- If it is the parent company of a group, the business as a whole must meet the requirements of the scheme.
How The Money Raised By The Relevant Share Issue Must Be Used
It is essential that within three of the share issue all the funds raised have been spent for the purposes of a qualifying business activity. If this condition is not met, investors will lose their tax relief.
Buying shares or stock in another company is not regarded as being spent for a qualifying business activity. However, the company can invest the funding into a subsidiary at least 90% owned by the company, providing that the monies are thereafter used for a qualifying business activity.
The payment of dividends to shareholders is not a qualifying business activity.
A qualifying business activity is either:
- carrying on a new qualifying trade;
- the activity of preparing to carry on a new qualifying trade which the company intends to and subsequently does carry on; or
- undertaking research and development which will lead to or benefit a new qualifying trade.
What Is A Qualifying Trade?
The principal rule is that a qualifying trade is one which is conducted on a commercial basis with the aim of making a profit.
However, the following trades are excluded and, therefore, not eligible for SEIS:
- dealing in land, in commodities or futures, in shares, securities or other financial instruments;
- dealing in goods other than in an ordinary retail or wholesale distribution manner;
- financial activities such as banking, insurance, money-lending, debt-factoring, hire-purchase financing or any other financial activities;
- leasing or letting assets on hire, except in the case of certain ship-chartering activities;
- receiving royalties or licence fees unless through an intangible asset that the company itself has created;
- providing legal or accountancy services;
- property development;
- farming or market gardening;
- forestry activities or timber production;
- shipbuilding, coal production or steel production;
- operating or managing hotels or comparable establishments;
- operating or managing nursing homes or residential care homes;
- generating or exporting electricity;
- providing services to another person whose trade is itself an excluded activity.
The Benefit Of Advanced Assurance
In order to give comfort to your potential investors that your business qualifies for SEIS, HMRC have introduced an Advanced Assurance facility.
Their Small Companies Enterprise Centre (SCEC) will decide if your company and share issue qualify under SEIS and monitor you to ensure that they the requirements continue to be met for the duration the share issue.
Under Advanced Assurance, you can submit details of their plans to raise money, business structure and activities to SCEC in advance of the share issue. In turn, SCEC will provide counsel on whether or not the proposal is likely to qualify for relief.
Although this is not mandatory, we would strongly advise taking advantage of this especially if this is your first SEIS application.
Submitting The Final Application
Before your investors can claim their tax relief, your company must complete form SEIS1 and submit it to SCEC.
The form is essentially a declaration that, at the time of completion, your company has already met the requirements of the scheme to the date and that it expects to meet all other requirements.
You also need to provide the details of your investors. However, our Top Tip is that you only need to include the details of investors that will be claiming SEIS relief. For a variety of reasons, the investor may be ineligible or not benefit from SEIS, so it is important to establish this as part of the investment process.
You can only submit the SEIS1 once your company has been either:
- trading for at least four months; or
- if not yet trading, at least 70% of the monies raised has been spent on a qualifying business activities.
Assuming SCEC accepts that the all the requirements have been met, it will issue your company with a certificate accordingly and will supply claim forms (SEIS3s) for you to send to your investors so they can claim tax relief.
The £150,000 maximum borrowing can be aggregated through multiple share issues for different funding elements. The process must be followed for each issue of shares where it is intended SEIS relief will be claimed.
Hence, the value in ascertaining from your investors whether they intend to claim SEIS relief.
How Do Your Investors Claim Their Tax Relief?
The tax relief can only be claimed once your company has issued the investors with their SEIS3 form. Most commonly, the investor claims their relief on the Self-Assessment tax return for the tax year in which the shares were issued.
However, the investor can claim the relief at any time up to five years after 31st January following the tax year in which the investment was made. For example, for an investment made in the 2016-17 tax year, the relief can be claimed up to 31st January 2023.
This flexibility can be extremely advantageous to a backer looking to optimise their tax efficiency.
The Next Step
On paper, this process can seem daunting but the reality is that, with good advice, it is fairly straightforward. At CooperFaure, we have vast experience of helping business start-ups to secure funding and, in particular, benefit from government schemes.
As your business matures, the Enterprise Investment Scheme or Venture Capital Trust offer a similar style of investor benefits, albeit at a lower 30% level of tax relief, for funding of up to £5,000,000 in a twelve-month period.
If you would like an initial call or meeting to discuss your circumstances, please email us at email@example.com to arrange a time. It is absolutely free and there is no obligation.