Have you heard of the Seed Enterprise Investment Scheme?

According to the latest Government data, over 1,000 companies have raised finance via the SEIS since its launch in 2012. So, why have so few business owners heard of the scheme, and what benefits does it offer businesses and potential investors?

Since the Seed Enterprise Investment Scheme was implemented in April 2012, it has raised over £80m from private investors, and has helped raised fund a modest (but growing) number of businesses.

The Scheme provides some attractive tax benefits to individuals prepared to invest in higher-risk businesses, and can provide funding for businesses which may find in hard to access traditional sources of finance.

Given the apparent benefits the SEIS offers, it may come as some surprise that only 8% of business owners have even heard of the scheme, according to a recent Baker Tilly study. This, according to a subsequent report by the Public Accounts Committee may be as a result of poor communication by the Government.

SEIS – Basics

• Scheme aims to promote entrepreneurship, and stimulate economic activity bu encouraging investment in early stage small enterprises.
• Open to companies with 25 or fewer employees, gross assets of £200k or less, under two-years old, and with a permanent base in the UK.
• Investors can invest up to £100k per tax year (to a maximum of £150k over two years).
• These investments qualify for 50% income tax relief, and any profits are exempt from Capital Gains Tax if they have been owned for 3 years or more.

SEIS – Tax Issues

Carol Cheesman, principal at Cheesmans Accountants notes that, “a potential disadvantage of using SEIS is that the tax laws are fairly complex – but this is in the process of being simplified.”

Therefore, before considering applying to use the SEIS, you should be aware of the following:

• An investor cannot own more than 30% of the company’s issued share capital. This includes an interest he/she may have via an ‘associate’, such as business partners, or family members.
• The investors cannot be employed by the company during the three-year qualifying period (although being a company director is non classed as ’employment’ for these purposes).
• The attractive CGT and income tax reliefs offered by investors in the SEIS may be reduced, or removed altogether if a) the investor becomes a company employee within three years of the share issue, b) his/her investment becomes greater than 30% of the company’s issued share capital,  c) if the shares are disposed of to anyone except a spouse / civil partner, d) the investor receives value from the company such as a loan or other benefit, or e) the company loses its SEIS qualifying status.

Is the SEIS right for your business?

If you’re interested in taking advantage of the scheme, Carol Cheesman firstly advises seeking advanced reassurance from HMRC.

Secondly, the company should fill in a form SEIS1. However, the form cannot be submitted to HMRC until the company has been trading for four month or more, or has spent 70% of the funds invested.

If HMRC decides that the company qualifies for SEIS status, it will issue a certificate together with SEIS3 claims forms to provide to investors.

“If you have started, or are about to start, a new business and you need external funding then it is worth considering SEIS. However, it is always advisable to get professional advice – not only to ensure that you meet all the required criteria but also to ensure that SEIS is the best way forward for your company. It has many advantages but it is not always right for everyone and once you’re registered as a SEIS company you need to make sure that you continue to fulfil the relevant criteria in order to maintain the tax benefits.”