SEIS – the easy guide to how it works and how to use it
SEIS is the best thing since sliced bread for young companies looking to raise finance
The story so far
SEIS (the seed enterprise investment scheme) was introduced by the Chancellor in 2012 and its aim is straightforward; it provides a substantial helping hand to start-up and early stage entrepreneurs who are raising ‘seed’ funding to get their business off the ground. The term seed funding is deliberate: it provides the finance to pay for the entrepreneur to validate a business concept, i.e. demonstrate or even prove that the idea is worth investing in further, i.e. it could potentially make a lot of money.
I think that SEIS is one of the best things the Government has done for entrepreneurs. What it does is help investors over that final hurdle in the risk hurdle race, by significantly reducing their possible losses.
How does SEIS work then?
Basically, there are very generous tax reliefs if an investor puts money into an eligible company. If you invested say £50,000 cash for shares, you would get 50% of that as a relief against your income tax bill; in this example you would therefore save £25,000 in tax. So effectively, rather than the Government getting it, the entrepreneur gets to use it to grow their enterprise. If the investor then holds the shares for at least three years, they will not have to pay any capital gains tax on any profit they make when they finally sell those shares.
Am I eligible to use SEIS?
The company’s trade must have been started less than two years before shares are issued. Most types of business are eligible, but there are a few exceptions such as financial services, property development and agriculture. The company must have fewer than 25 staff and assets of less than £200,000 pre-investment. An individual investor can get SEIS relief on up to £100,000 per annum, and can be a director of the company but not an employee. If someone has more than 30% of the shares then they are ineligible for SEIS.
What if I need more than £150,000?
The rules have been created in the knowledge that many companies will need additional funding at the time of or following a seed investment round. The SEIS maximum of £150,000 per company does not mean you can’t raise more than that in the initial round of funding – it’s just the amount on which tax relief will be given. Say you raised £250,000 in a first round: eligible investors could get SEIS relief on the first £150,000 but none on the balance. However, the rules do allow you to raise £150,000 under SEIS but then raise further equity finance under EIS (enterprise investment scheme). EIS is SEIS’s older and bigger brother and it allows individuals to invest up to £1 million per year, and the eligibility rules are much the same except there is no requirement that the trade is under two years’ old.
A real life example
We helped a technology company to raise £170,000 of equity funding. Of that total, £20,000 was invested by a non-UK resident person, so the other £150,000 was all eligible for SEIS relief. We had previously obtained ‘advance assurance’ from HMRC that the company was eligible for SEIS, to reassure the investors. The deal was completed and then we applied to HMRC for SEIS certificates, and these were issued within a week. The six investors will obtain £75,000 of income tax relief between them, and in addition, there were some specific capital gains reliefs that will save SEIS investors some tax on any gains they have made in that year.
As an example, one shareholder who invested £40,000 saved a total of £31,200 in tax, so his investment of £40,000 cost him £8,800 in real cash! This is a real advantage that helps entrepreneurs raise that very difficult initial funding for their business.