What is the Seed Enterprise Investment Scheme (SEIS)?

Small and new businesses looking to raise capital for growth have a number of different options they can explore, from debt and asset finance, to grants and equity.

For those early-stage or smaller businesses looking to raise capital through equity, the Seed Enterprise Investment Scheme (SEIS) could be beneficial.

In this article we’ll cover what the SEIS scheme is, some of the advantages of the scheme to smaller businesses, and how to apply.

As with all financial products, it’s a good idea to take independent financial advice if you think applying for SEIS might be right for your business.

What is the Seed Enterprise Investment Scheme (SEIS)?

Like the Enterprise Investment Scheme (EIS) The Seed Enterprise Investment Scheme (SEIS), established in 2012, is a UK government initiative designed to stimulate economic growth and foster innovation by encouraging private investors to buy stakes in smaller businesses.

This scheme assists smaller and likely younger businesses in securing the necessary capital for expansion through private share purchases.

Companies taking advantage of the SEIS can raise up to £250,000 with the gross limit being set at £350,000.

The annual investor limit is set at £200,000.

Any capital raised by a company through the SEIS must be spend on either:

• Expenses to help grow the company such as marketing, new equipment, or more employees
• Research and development which will enhance the growth potential of the company in the future such as developing a new product.

Due to the nature of smaller and younger businesses being inherently a riskier proposition for investment than more established companies (which are likely to take advantage of the Enterprise Investment Scheme or even a full IPO), the SEIS offers investors a number of tax advantages to encourage investment.

What are the advantages of the Seed Enterprise Investment Scheme to businesses?

SEIS is designed to help smaller or newer businesses secure crucial funding to grow.

Under SEIS, start-ups can raise up to £250,000.

It's important to note that this sum includes any other de minimis state aid received within the three years leading up to and including the date of the investment.

This funding raised through SEIS also counts towards any limits for subsequent investments made through other venture capital schemes.

If your business is eligible, you may be able to secure additional funding through the Enterprise Investment Scheme (EIS) after exhausting your SEIS limit.

Please remember that funds raised through SEIS must be spent within three years of the share issue and should be used to develop and grow your business.

Why is the Seed Enterprise Investment Scheme attractive to investors?

Investors participating in SEIS can avail of several incentives:

Income Tax Relief

Investors are eligible for up to 50% income tax relief on their investment, with the current limit set at £200,000 per year.

Capital Gains Tax Exemption

Profits derived from the sale of shares are exempt from Capital Gains tax, provided the shares have been held for a minimum of three years.

Loss Relief

Investors are eligible for up to 50% income tax relief on their investment, with the current limit set at £200,000 per year.

In the event of an unsuccessful investment, the government provides loss relief, which can be used to offset tax on other sources of income.

Capital Gains Reduction

If an investor decides to liquidate other investments to support a SEIS-qualified venture, the capital gains on the original investment are eligible for a 50% tax reduction.

Overall, SEIS aims to make investing in smaller and higher risk companies more attractive and financially viable for private investors.

Which companies are eligible for Seed Enterprise Investment Scheme?

Your business is eligible to apply for SEIS if it meets the following criteria:

• the company must be established in the UK
• it should be involved in a new qualifying trade
• the business should have been trading for no longer than three years
• the company's gross assets should not exceed £350,000 at the time of share issuance
• the business should not be listed on a recognised stock exchange at the time of share issuance
• the company should have fewer than 25 employees when the shares are issued
• The company should not control another firm unless it is a qualifying subsidiary
• post incorporation, the business should not have been controlled by another company
• the company should not be part of a partnership
• the business should not have received investment through the EIS or from a venture capital trust.

Companies based outside the UK can still qualify for SEIS if they maintain a permanent establishment in the UK.

This could be a fixed place of business such as an office, factory, or shop, or a UK-based agent who has the authority to enter contracts on behalf of the company.

Please note that certain trades such as property development, financing services, and leasing activities are excluded from eligibility.

For more information about qualifying trades and company eligibility, you can check the government's guidelines.

How to check investor eligibility for the Seed Enterprise Investment Scheme

Before engaging with potential investors, it's crucial to ensure they meet the eligibility requirements for SEIS.

An eligible investor under SEIS must:

1. Be an individual, not a corporate entity.
2. Be a taxpayer in the UK.
3. Not hold more than 30% of the company's total shares. Any more would be considered a 'substantial interest' by HMRC and disqualify them from SEIS.
4. Not be an employee of the company or have a close relative employed by the company.

It's important to note that while employees of the company are not eligible for SEIS, company directors are not subject to this restriction.

Finally, please remember that SEIS relief is only applicable to ordinary full-risk shares.

Shares that come with additional rights are not eligible for this scheme.

How does a business apply for the Seed Enterprise Investment Scheme?

Applying for SEIS involves providing HMRC with specific information about your company.

Key documents and information HMRC will need include:

Financial forecasts

These provide an outlook on your company's financial performance and offer insights into its potential profitability.

A business plan

This document outlines your company's objectives, strategies, and projected timelines.

Additional documents

Details of any previous investments received from capital schemes.

For a comprehensive list of all the required documents, you can visit the Gov.uk website.

It is crucial to provide accurate and complete information to ensure a smooth application process.

What is Advanced assurance?

Before proceeding with an application to SEIS, it's possible to verify with HMRC if your intended investment adheres to the SEIS eligibility conditions.

This step, known as gaining 'advance assurance', can potentially make investors more confident about investing in your business.

To obtain this advance assurance, certain documents must be submitted to HMRC. These include:

1. A copy of the most recent accounts.
2. A comprehensive business plan.
3. Specific details of the amount you aim to raise through the investment.

Advance assurance can be a valuable tool in attracting potential investors by providing them with the confidence that the investment is likely to qualify for SEIS.

For more information about obtaining advance assurance, you can visit the designated section on the Gov.uk website.