As part of the Government’s increasingly controversial mini-budget, the Chancellor of the Exchequer announced the Government’s Growth Plan 2022 which introduces significant tax benefits for individuals and businesses. Amongst those benefits are unexpected, but very welcome, changes to the Seed Enterprise Investment Scheme (“SEIS”).
SEIS is a tax incentive scheme that gives individual “angel” investors up to 50% of the amount they invest back as a credit against their income tax liabilities. So long as the start-up continues to meet certain qualification requirements, investors who have claimed SEIS tax relief on their original investment are able to sell their shares free of capital gains tax giving them a tax-free exit.
The current SEIS rules allow start-ups to raise up to £150,000 using SEIS from individual “angel” investors providing that they meet certain requirements, including that they have been trading for less than two years and their gross assets immediately prior the issue of the shares to investors do not exceed £200,000. Under the proposed changes (which will take effect from 06 April 2023):
- the company lifetime allowance for SEIS investment will increase from £150,000 to £250,000;
- the qualifying trading period for SEIS eligibility will increase from two years to three years from the date of commencement of trade; and
- the upper limit of a company’s gross assets will increase from £200,000 to £350,000.
In addition to these company benefits, the maximum amount that an angel investor is able to invest in start-ups using SEIS in any tax year will increase from £100,000 from £200,000.
The Enterprise Investment Scheme (“EIS”) (which is the larger scheme applying to the next £10m/£12m depending on the type of business raised by the start-up from angel investors) was due to end in 2025. The Chancellor announced that the Government’s intention is to extend EIS beyond its current 2025 cut-off.
These changes are incredibly good news for start-ups and reflect the importance of the start-up ecosystem to the UK economy. They come in parallel with the Government’s announcement of new innovation zones across the country that will offer tax incentives to new businesses operating there.
SEIS is vitally important and is used by huge numbers of start-ups to raise that tricky first round. These changes mean that start-ups will be able to raise more investment under the scheme over a longer period of time and despite having a slightly larger gross asset value. Although the changes do not come into effect until April 2023, start-ups can start to line-up investors and obtain HMRC clearance to qualify for the scheme.
What is more, companies could even take money from investors now using a structure called an “advance subscription”. The relevant date for SEIS is the date on which shares are issued. So long as companies use the right documentation, they are able to take funds from investors but delay the issue of shares for up to six months. So long as the share issue occurs after 06 April 2023, the new regime would apply.
In circumstances where a business has already raised the maximum of £150,000 under the current SEIS rules but has not raised any investment for which investors have claimed EIS, the start-up could potentially raise an additional £100,000 via an advance subscription with shares to be issued after 06 April 2023 providing that the company has been trading for less than three years at the date of the share issue (after 06 April 2023) and has not issued any EIS shares prior to that date.
“In this mini-budget, the Chancellor has laid a golden egg that will support the entire start-up sector for years to come. Expanding SEIS demonstrates in the clearest possible manner that the Chancellor and the Government understand the importance of the start-up sector to the UK economy. The statement that the government intends to extend EIS beyond 2025 is vitally important and will encourage investors to continue to invest in UK start-ups despite the more challenging economic environment.”