03 Oct

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 Government 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 test2 a business idea, i.e. demonstrate or even prove that the concept is worth investing in further, whether it could potentially make a lot of money.

I think that SEIS is one of the best things this Government has done for entrepreneurs. What it does, by reducing the actual cash cost of their investment by giving them big amounts of tax relief, is to help investors by significantly reducing their possible losses.

In the 2014/15 tax year, nearly 3,000 companies applied to HMRC for SEIS approval. About one third were high tech businesses, while the restaurant and catering sector was also popular. This fits with our experience – we helped various software companies and some bars and cafes seek SEIS approval last year.

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 Treasury 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. Anyone who has or gets more than 30% of the shares is 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 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 (the enterprise investment scheme) once the company has spent at least 70% of that £150,000. EIS is SEIS’s older and bigger brother and it allows individuals to invest up to £1 million per year, and a company to raise £5 million p.a. 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 UK investors obtained £75,000 of income tax relief between them.

SEIS is a real benefit that helps entrepreneurs raise that very difficult initial funding for their business.

Jerry Davison