Start-ups and early-stage businesses represent some of the highest risk investment opportunities on the market. The Seed Enterprise Investment Scheme (SEIS) is an initiative set up by the UK government in 2012 is an investor relief scheme aimed at getting private investors to invest in very high-risk, early-stage businesses by offering significant tax breaks, making seed investment a much more attractive investment option.
In turn, it is easier for new-born businesses to get hold of the initial investment they need to get off the ground, making the UK an attractive spot for new business ventures. The UK government has introduced lots of initiatives targeted at encouraging entrepreneurial activity in recent years to boost the UK economy. This guide will take you through the fundamentals of SEIS from a company and investor perspective, specifically covering:
- What is SEIS?
- How does SEIS work?
- SEIS rules, requirements and eligibility
- How to obtain SEIS status (Companies)
- How to make a claim for SEIS tax relief (Investors)
- The types of tax relief available through SEIS
- How do you find SEIS investment opportunities?
- SEIS versus EIS
- Maximising SEIS tax breaks
- To SEIS or not to SEIS
What is SEIS?
SEIS is a scheme offering huge tax breaks to private investors when they invest in eligible companies, usually in the form of tax relief. There are five main ways that investors can profit from SEIS tax benefits:
- Income tax relief up to 50%
- Capital Gains Tax relief on shares disposed of after three years
- Capital Gains Tax Reinvestment relief when investors use gains to reinvest in SEIS eligible companies
- Loss relief when you lose your investment
- The option to apply tax relief to a previous year (carry-back).
We will later look at each of these options in closer detail, including their specific eligibility requirements.
How does SEIS work?
SEIS is designed to help new businesses attract seed funding. Companies can receive up to £150,000 through SEIS investment. This amount counts towards the limits of other venture capital schemes if you later apply for other types of funding.
There are many rules which accompany the initiative to ensure that the scheme targets the right companies, namely small start-ups. First off, the scheme is very strict concerning the purpose of the investment. For companies to qualify, the investment must be spent within three years of the date of issue of the shares and must be used on a qualifying trade, either on the trade itself or on preparations for carrying out a qualifying trade. These two factors are essential prerequisites to any claim.
What counts as a qualifying trade?
HMRC accepts the majority of trades for the scheme. Any research or development which will lead to the business carrying out a qualifying trade is also accepted. There are, however, some excluded business activities. Some examples are:
- Coal or steel production
- Farming or market gardening
- Legal or financial services, including banking and insurance
- Property development or leasing
- Production of fuel
- Energy generation
- Exporting electricity
- Operating hotels or care homes
- Providing services to a non-qualifying business
- Dealing in futures or securities.
Excluded trades may not account for more than 20% of your daily business activities if you are hoping to qualify for SEIS. HMRC will evaluate your past and present business operations to determine how much time your company spends on excluded trade. If you’re unsure of whether you will qualify, you can seek ‘advance assurance’ from HMRC, which you can find explained later on.
SEIS rules, requirements and eligibility
The Seed Enterprise Investment Scheme offers some of the world’s most lucrative tax benefits. Naturally, then, there are a number of rules in place to regulate applications and prevent abuse of this benefit, both investors and companies must satisfy a list of qualifying requirements to be eligible.
Once you’ve established that your trade qualifies for the scheme, you can go about procuring investment. Make sure your investment satisfies the following rules:
- The shares you issue must be full-risk ordinary shares
- The issued shares must be paid for in full, in cash by the date of issue
- There cannot be a guarantee to the investment or structures in place to protect the investor
- The investment must take place for a genuine commercial reason, and not for tax avoidance purposes.
Is your company eligible for SEIS?
As a company looking for SEIS investment, you must fulfil the following qualifying conditions:
- The total value in gross assets of the company must be less than £200,000 at the time you issue the shares
- Your company must have a permanent establishment in the UK
- Your company must not appear on a recognised stock exchange at the time of investment
- Your company must have no arrangements to become a quoted company or subsidiary of a quoted company at the time of share issue
- Your company must not have been trading for more than two years
- Your company does not control any other company, with the exception of qualifying subsidiaries
- Your business must have fewer than 25 full-time employees
- You may only raise a maximum of £150,000 through SEIS investment in the company’s lifetime.
The £150,000 limit includes any other de minimis state aid received in the three years up to the date of issue of the shares. Any money raised through SEIS investment also counts towards limits for any later investments procured through other venture capital schemes offered by the government.
It is important to note that if your company has received investment through the Enterprise Investment Scheme, or from a venture capital trust, you are not eligible for SEIS.
Are you an SEIS eligible investor?
If you’re a private investor hoping to qualify for SEIS tax relief, you must adhere to the following regulations:
- You must be a UK taxpayer
- You must hold the shares for at least three years
- You must have no more than a 30% stake in the company
- You must not be a connected employee or director of the company
- You may only invest up to £100,000 in each tax year
- You may not carry-forward your SEIS tax relief.
The three-year minimum shareholding period means that SEIS investors must be prepared to make long-term investments. For this reason, SEIS is only suitable for experienced, wealthy investors who have plenty of capital and no need for short-term liquidation of assets.
Individuals may invest in as many qualifying companies as they like, so long as their total investment does not exceed £100,000 per tax year.
Should investors later become directors, they can still qualify for SEIS provided that they were not connected to the company in an employment capacity at the time of issue of the shares. The scheme accepts this exemption so as not to exclude business angels from the scheme who later take on active management or board roles.
The risk to capital condition
Before HMRC even consider an investor or company’s eligibility for the scheme, they first seek evidence that the investment opportunity represents a ‘risk to capital’. This condition comprises two aspects.
Firstly, the company hoping to qualify for SEIS must show that it intends to grow and develop its trade in the long term. Growth and development can include growing a client base, employing more staff and growing revenue, among other things.
Secondly, the investor’s capital must be significantly at risk. HMRC will want evidence that the investor stands to lose more money than they could gain as a net return.
This crucial addition prevents businesses from qualifying for the scheme in instances where they’ve somehow insured their investors through asset-backed or low-risk structured investments. The risk to capital condition was introduced as part of the 2018 Finance Bill and ensure that investors are motivated by a genuine intention to support the business, rather than to avoid tax.
How can you be sure that you’re eligible?
Being one of the widest-ranging series of tax relief available in the UK means that the scheme comes with a lot of qualifying conditions. Both parties in the investment must satisfy the above conditions not only at the time of investment but for three years afterwards.
The rules can be tricky to navigate, and for every rule, there’s an exception. If you’re unsure if you qualify for SEIS, you can request what’s known as ‘advance assurance’ from HMRC. Many investors will demand such assurance before they part with any cash to make sure the investment opportunity is eligible for SEIS.
Obtaining advance assurance
To obtain advance assurance, you need to apply directly to HMRC. The process typically takes six to eight weeks. They’ll want to see your business plan, as well as your recent accounts, a three-year financial forecast, and a cover letter.
For advance assurance, HMRC will also require your Unique Taxpayer Reference number (UTR). Many early-stage companies don’t have a UTR – you’ll need to apply for this number before applying for advance assurance. Obtaining a UTR can take about a week. Recently, HMRC also requires details of a proposed investor in your application.
If a company owns subsidiaries, is it SEIS eligible?
Companies can still achieve SEIS eligibility status when they own subsidiaries, as long as they meet the requirements for ‘qualifying subsidiaries’. These stipulate that:
- your company owns at least 50% of the subsidiary’s share capital
- the subsidiary is only controlled by your company or another of its qualifying subsidiaries
- the subsidiary carries out a qualifying trade.
If any of your company’s subsidiaries are going to be spending the investment made through SEIS, then your company must own 90% of the share capital in that subsidiary. While companies are permitted to have subsidiaries, your company may not be a member of a partnership with another company.
How to obtain SEIS status (Companies)
Before investors can make a claim, companies need to apply to HMRC by submitting a compliance statement. Companies can do this only after the investment has taken place, and once they have carried out a qualifying trade for at least four months. On top of this, the company must have spent at least 70% of the invested amount before applying.
Then, the company needs to complete the ‘Seed Enterprise Investment Scheme compliance statement’, otherwise known as the SEIS1 form. This form is available on the HMRC website.
If you don’t have advance assurance, or if your company’s circumstances have changed since obtaining it, you will need to provide further documentation to support your application. For your company, as well as any of its subsidiaries, HMRC will need a copy of the following:
- Your business plan and financial forecasts
- Your latest accounts
- Evidence that you meet the risk to capital condition
- Details of trading activities your business intends to operate daily as well as estimations of how much time you intend to spend on each activity
- Any supporting documents to your fundraising proposal, for example, a memorandum or prospectus
- Details of any arrangements between your company and the shareholder
- Details of any previous investment raised under a venture capital scheme.
These documents, as well as your compliance statement, can be either emailed or posted to HMRC to be considered.
If your application is successful, HMRC will issue your investors with a Unique Investment Reference number. This number allows you, as the issuing company, to provide your investors with an SEIS3 certificate, which, in turn, enables them to claim relief.
Can a company raise SEIS and EIS investment?
A company may procure SEIS investment and then go on to raise investment through EIS, once they’ve reached the £150,000 limit for SEIS. You must ensure, however, that you do not issue EIS shares and SEIS shares on the same day. In this case, HMRC will demand that you pull out of one scheme.
How to make a claim for SEIS tax relief (Investors)
The SEIS3 is a compliance certificate, issued by SEIS eligible companies to show that they’ve satisfied their qualifying conditions for the scheme. As an investor, once you’ve received your SEIS3, you’re able to claim tax relief. HMRC may request to see this certificate at any time, so keep it to hand.
For claims in the current tax year, you can either request a change to your PAYE tax code or an adjustment to your Self-Assessment. To claim for the previous tax year, you need to make a claim on your Self-Assessment tax return.
Claiming for Income Tax relief
To make a claim for income tax relief under the SEIS, you’ll need to include this on your Self-Assessment tax return. You must provide the total amount of investment on which you’re claiming relief in the ‘Other tax reliefs’ box, which you can find in the ‘Additional Information’ or SA101 pages of your tax return.
You must provide details of each of your SEIS investments made in that tax year in box 19 on page TR 7 of the tax return. You’ll need your Unique Investment Reference (UIR), the name and reference of the relevant HMRC office, the name of the company you invested in as well as the amount on which you’re claiming relief and the date of issue.
You cannot claim relief for any investment for which you have not yet received an SEIS3 form, even if you are due this form. If you receive this certificate after submitting your tax return, you can complete the claim form provided with the certificate and send it to HMRC.
Claiming for CGT relief
To claim for CGT reinvestment relief, you must fill out the Capital Gains Tax summary pages of your Self-Assessment tax return. In box 28, page CG 2 of these pages, you must enter the code ‘OTH’. You must also complete the claim form attached to the SEIS3 certificate you receive from the issuing company and attach it to your Self-Assessment tax return. This claim form must also be submitted if you want to claim for Capital Gains Deferral relief.
When is the deadline for submitting a claim?
You must submit a claim for relief under the SEIS within five years of the 31st January following the tax year in which you invested.
The types of tax relief available through SEIS
We’ll now take a closer look at each of the tax reliefs available through the Seed Enterprise Investment Scheme. Many of the reliefs demand additional qualifying conditions.
Income tax relief up to 50%
The most attractive tax benefit offered under the SEIS scheme is income tax relief. Eligible investors can claim up to 50% of the value of their investment back by having it deducted from their income tax bill in the way of relief.
For example, if you invest your full £100,000 annual limit into an SEIS eligible company, you can claim £50,000 off your income tax bill in the year you made your investment.
Capital Gains Tax relief
If you’ve held your shares for a minimum of three years, when you come to dispose of them, you may be eligible for Capital Gains Tax exemption on your investment gains.
Capital Gains Tax applies to gains made from selling any asset with a value of more than £6,000 (excluding your car or main home). CGT can vary from 10% to 28%, which can be a significant sum, making CGT relief of up to 100% a huge benefit of the scheme.
If you initially invest £20,000 into an SEIS eligible company and the value of your shares doubles over the course of three years, CGT relief means that you can keep the £20,000 gains without paying any CGT on the profit.
Capital Gains Tax Reinvestment relief
CGT relief is not only a possibility for SEIS investments. If an investor uses the gains from a non-SEIS investment to invest in a company eligible for SEIS, they can claim 50% of Capital Gains Tax relief on the original investment.
Therefore, if a prior investment has earnt you £20,000 in gains which you choose to reinvest in full in an SEIS eligible company, £10,000 of that profit will be tax-free!
Loss relief when you lose your investment
There is a high possibility when investing in early-stage businesses that investors will not see their money returned. Many investors will avoid such high-risk opportunities. One of the ways the SEIS aims to encourage investment in such risky ventures is by offering loss relief, which mitigates investors’ losses.
The amount of relief you can claim on your net loss is equivalent to the highest rate of income tax you pay. For most investors, this will be 45%. You can claim loss relief against either your income tax bill or your Capital Gains Tax bill.
Loss relief is available in addition to income tax relief. Therefore, for an investment of £100,000 into an SEIS company which then fails, the investor can firstly claim £50,000 in income tax relief. On the remaining £50,000 loss, assuming the investor pays 45% income tax, they can claim back 45% of the loss, which is £22,500. So, for a £100,000 investment, the investor only makes a loss of £27,000 – less than a third of their original investment!
Applying tax relief to a previous year (carry-back)
As part of the SEIS initiative, investors can carry back their relief to a previous tax year. This relief treats shares as if they were issued in the previous tax year. Carry-back allows investors to maximise their tax relief over several years.
For example, if you invested £20,000 in an SEIS investment opportunity in the 2018/19 tax year, your income tax relief entitlement would be £10,000. Carry-back allows you to apply this relief to the 2017/18 tax year, provided you haven’t exceeded your £100,000 SEIS investment limit for that tax year.
Inheritance Tax relief
Provided the investor held their shares for at least two years before they passed away, beneficiaries may claim up to 100% inheritance tax relief when they inherit SEIS shares.
How do you find SEIS investment opportunities?
Investors can either invest directly in an SEIS qualifying company or an SEIS fund. Investing directly in a single company offers the investor more control and transparency. However, it comes with higher risk as your returns are reliant specifically on that company. An SEIS fund can alleviate some of the pressure of investing by allowing a fund manager to make your investment decisions for you. Of course, the drawback is that you have less control and will have to pay a fund manager.
As SEIS investments aren’t listed on the stock market, another way to find SEIS investment opportunities is through a specialist broker or SEIS fund.
How do you find SEIS investors?
As a company hoping to find an SEIS investor, there are many networking events you can attend to meet early-stage or start-up investors. Many invest almost exclusively in SEIS or EIS opportunities, making advance assurance one of the best things you can do to secure investment.
SEIS versus EIS
You may be familiar with the Enterprise Investment Scheme (EIS), which fathered SEIS. The former was introduced back in 1994, some 18 years before SEIS. The two schemes are very similar.
HMRC broadly differentiates the two by describing the EIS as an aid to grow a business, while SEIS helps a business start to trade. While both focus on encouraging investment into early-stage businesses, the SEIS explicitly targets younger, newer businesses.
The qualifying conditions for each scheme mirror this difference. While the EIS demands fewer than 250 employees, which remains a small company by UK standards, the SEIS requires fewer than 25. Such small companies are in the first stages of development.
Generally, the qualifying conditions and tax breaks offered are very similar. Both forms of investment represent a high risk to investors’ capital. The increased income tax relief available under the Seed Enterprise Investment Scheme reflects this increased risk with very early-stage businesses.
Maximising SEIS tax breaks
Qualifying investors are not limited to just one of the tax reliefs detailed above. Investors can enjoy as many of these tax benefits for which they are eligible. Many investors find themselves eligible for several tax benefits in the same investment opportunity. To see how this works, you can find some worked examples below.
Mr Aitchison invests £40,000 into an SEIS eligible business. After three years, the business has remained the same value. At this point, he disposes of his shares.
Mr Aitchison may claim £20,000 back as income tax relief, on either the tax year in which he acquired the shares or against his bill from the previous tax year. His returns after three years are £20,000. This brings his total returns to £50,000 – despite the business not increasing in value, Mr Aitchison has been able to make a profit on his investment through the Seed Enterprise Investment Scheme.
Ms Moore invests £20,000 in an early-stage business, qualifying for SEIS. After three years, her shares have doubled in value. At this point, she disposes of the shares.
Not only can Ms Moore claim £10,000, representing 50% of her initial investment, in income tax relief, she is also exempt from CGT. This exemption means she can keep her entire £20,000 gain, bringing her returns to £50,000!
Mr Froughi invests £50,000 into an SEIS eligible start-up. The business unfortunately folds, and Mr Froughi’s shares become worthless.
Firstly, Mr Froughi claims income tax relief equal to 50% of his investment, giving £25,000. This leaves £25,000 of his capital still at risk. On this, he can claim 45% back as loss relief, against either his CGT or income tax bill, representing £11,250.
Mr Froughi therefore only loses £13,750 of his initial £50,000 investment. This means that despite the business failing, he saved a staggering 72.5% of his initial investment through the scheme!
As these three examples demonstrate, the scheme allows for impressive returns and serious mitigation on losses for SEIS investors.
To SEIS or not to SEIS
Investing in any new business is incredibly risky. Start-ups and very early-stage businesses have little to show for themselves – almost all of their forecasts are estimations, and some entrepreneurs won’t have previous experience in business.
The SEIS is a lucrative scheme specifically designed to ease the burden of such risky investments and to give budding companies a better shot at getting hold of the capital they need to take off. But SEIS cannot eliminate these risks. It’s a scheme which should, therefore, only be considered by high net-worth individuals who have enough capital, and experience, to survive significant losses.