SEIS is one of the most generous (and widely used) tax incentive schemes for investors in startups in the world. Every entrepreneur needs to know about it and (where possible) take advantage of it.
This note explains the basics of SEIS.
The Seed Enterprise Investment Scheme (SEIS) is a tax relief scheme for investors investing in startup companies. The rationale behind SEIS is to encourage high net worth individuals to invest in high risk startup businesses on a full risk basis.
SEIS offers investors generous income tax, capital gains tax and loss reliefs. Under SEIS, an investor can invest in a qualifying company up to a maximum of £100,000 per annum and a qualifying company can raise a total of £150,000 under SEIS.
Tax reliefs available
An investment that qualifies for SEIS can benefit from relief from income tax and capital gains tax.
Income tax relief: an investor is entitled to 50% income tax relief on the amount invested in shares in a qualifying company up to an annual limit of £100,000. The relief will be set against the investor’s personal tax liability for the tax year in which the investment was made, the previous year and the following year. Therefore if an investor invests £100,000 in tax year 2014-2015 and his tax liability for that year is £50,000, he can set the relief against his tax liability and reduce his tax liability to zero.
Capital gains tax relief: a qualifying shareholder can be entitled to up to 100% exemption from capital gains tax on a disposal of the SEIS qualifying shares if a claim for income tax relief has been made on the shares and they have been held for at least three years.
Loss relief: if the SEIS shares are disposed of at a loss, the loss can be set off against income made in the year in which the shares are disposed of, less any income tax relief already given.
Capital gains re-investment relief: capital gains re-investment relief is available for any gain made from a disposal of any asset giving rise to a chargeable gain in tax years 2013-14 where the chargeable gain is re-invested into SEIS qualifying shares. Note the SEIS investment can be made prior to the disposal of the asset providing both investment and disposal occur in the same year. Relief may be claim on a maximum investment amount of £50,000.
It is important to keep in mind that should an investor dispose of SEIS qualifying shares before the expiry of three years from the date of the investment, the relief will be withdrawn in its entirety. The relief will also be withdrawn should either or both the investee company and the investor fault to meet any of the requirements of the scheme as summarised below.
The investor must subscribe for new, full risk, ordinary shares. There must be no arrangement in place to protect the investor from any normal risks associated with an investment into a company. The shares cannot have any preferential rights and must be non-redeemable.
The investment must be made for genuine commercial reasons and not for tax avoidance purposes and the shares must be paid for upfront in full before the shares are issued. The investor must not dispose (or agree to dispose) of some or any of the shares prior to the end of the period of three years from the date of the investment.
The investment must not be part of a reciprocal arrangement whereby the investor subscribes for shares under SEIS in return for another person subscribing for shares in a company in which the investor or a connected person has a substantial interest.
The investor cannot be a person connected with the company. The investor cannot hold 30% or more of the share capital or voting rights and cannot be entitled to more than 30% of the company’s assets. When considering whether an investor holds a substantial interest, HMRC will take into account the shareholdings of those deemed associated with the investor. Associates include spouses, civil partners, business partners, grandparents, children and grandchildren but not brothers and sisters or step-parents.
The investor cannot be employed by the company during the three year investment period. An investor can however be a paid director of the company so long as he is paid reasonable remuneration. When considering whether remuneration is “reasonable” HMRC will consider what is reasonable remuneration for a director in the same line of work and similar circumstances and any expenses claimed must also be deemed reasonable.
Only a qualifying company can issue shares under SEIS. In order to be a qualifying company all investment funds must be applied towards progressing a new qualifying business activity within there years of the relevant share issue. A qualifying business activity includes a new trade carried on at the date of any preparatory activity, including research and development, which takes place with a view to carrying on a new qualifying trade at a later date. The qualifying trade must the sole purpose for which the company was set up.
The company must carry out a qualifying trade throughout the term of the investment. The trade must be less than two years old at the date the shares are issued and the issuing company must not have carried on any other trade prior to starting the qualifying trade for which funds are being raised.
From the date of incorporation until the end of the relevant three year investment period, the company must be independent. This means the company cannot be a 51% subsidiary or under the control of another company.
Money raised and used to buy stocks or shares in a company or payment of dividends to shareholders will not be deemed spent on a qualifying activity. However if the money is spent to buy stocks or shares in a 90% qualifying subsidiary which then spends the money on a qualifying business activity then the investor will be entitled to relief.
At the time the shares are issued the company must be resident in the UK, it must not be in financial difficulty, listed or have received any previous investment under any venture capital trust or EIS investment. The company must have twenty-five or less employees. Immediately before shares are issued the company must have no more than £200,000 gross assets.
Prior to the investment a company can apply for advance assurance from HMRC to see whether it meets all the requirements to qualify for investment under SEIS.
Once the share issue has been made, and 70% of the investment monies have been spent, or the company has traded for a minimum of 4 months, the company can apply to HMRC for a compliance certificate in respect of the share issue. Once HMRC has issued a compliance certificate the company can then issue the SEIS investor with a claim form SEIS3 so that he can claim his relief.
The investor claims relief by completing a Self Assessment tax return for the tax year in which the shares were issued. If an investor holds a form SEIS3 but has yet to be issued with a tax return, the investor can request a change to his PAYE tax code or any self assessment payment due. An investor can also claim retrospectively for any relief where it is too late to amend a Self Assessment return or where he is claiming capital gains tax reinvestment relief. Relief can be claimed up to 5 years from the 31st January following the tax year in which the SEIS investment was made.