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Raising capital is one of the most challenging and time-consuming steps for founders. The Seed Enterprise Investment Scheme (SEIS) is a UK government initiative designed to help startups raise capital by offering tax relief to individual investors who purchase new shares in your company. Understanding SEIS rules can significantly improve your startup’s ability to attract investment and help you determine whether your startup is eligible. This article will explain SEIS rules and the pitfalls to avoid if you want to use this fundraising method.
What is SEIS?
The Seed Enterprise Investment Scheme (SEIS) helps small, early-stage companies raise equity finance by offering tax relief to individual investors. SEIS is particularly attractive to startups because it reduces investors’ financial risk, making it easier to attract the required capital to grow your business.
This guide aims to introduce founders to the UK startup market. It provides extensive insights and practical advice on essential steps for launching your startup in the UK.
Investor Benefits
1. Tax Reliefs
A primary benefit of SEIS for investors is tax relief. Investors can claim 50% income tax relief on the amount they invested, up to a maximum of £100,000 per tax year. For example, if they invest £10,000 in your startup, they can reduce their income tax bill by £5,000 under the SEIS.
If investors sell their SEIS shares after three years, their profit is exempt from capital gains tax. They might also qualify for reinvestment relief.
2. Loss Relief
In addition to tax relief, SEIS also provides loss relief. Loss relief means that investors can offset their losses if your company fails.
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SEIS Rules
Through SEIS, your startup can receive a maximum of £250,000 in investment. You can seek advance assurance from HMRC about whether your company’s share issue will qualify for SEIS. Investors must buy the shares in full with cash at the time of issue to qualify. Following this, the investors can apply for SEIS tax relief through HMRC.
There are several rules and eligibility requirements relating to the scheme. If you do not follow the SEIS rules, HMRC can withdraw your investors’ tax relief.
To use the scheme, your company must:
- be permanently established in the UK;
- have gross assets of no more than £350,000; and
- have less than 25 full-time employees when issuing the shares.
It must not:
- be part of a partnership;
- be a listed company;
- be a shareholder in other companies;
- be a subsidiary or control a non-qualifying subsidiary;
- have been controlled by another company since its incorporation; or
- receive funds under other government-backed schemes, such as the Enterprise Investment Scheme (EIS) or from a venture capitalist trust (VCT).
Your startup must comply with all SEIS rules to benefit from the scheme. If it is not eligible, your investors will not be able to benefit from tax relief under the scheme.
Risk to Capital
A critical SEIS rule is the risk to capital rule. This rule means the investment should pose a certain level of risk to the investors’ capital. Investors must risk more capital than they stand to gain from their investment. HMRC will determine whether the investment meets this risk-to-capital standard.
It is important to note that the government intends SEIS investment to be short-term. Using the funds, you should be able to make permanent improvements to your company and set it up for long-term success.
Common Pitfalls to Avoid
1. Non-Qualifying Trade
You should ensure that your business activity qualifies for SEIS. Some specific trades, such as farming and financial and legal services, do not qualify.
You must spend the money your company raises within three years of the share issue. You can only spend this on:
- a qualifying trade;
- preparations to carry out that qualifying trade; or
- research and development efforts to lead to a qualifying trade.
2. Exceeding Investment Limits
Your company must adhere to the £250,000 cap on SEIS investments. Exceeding this limit can disqualify your startup’s investors from tax relief under the scheme.
3. Not Seeking Professional Advice
You should seek professional financial advice to ensure your investors can benefit from the scheme’s tax reliefs. An expert can assist you in determining if the scheme is suitable for your startup and what would be a qualifying investment.
Key Takeaways
Understanding SEIS rules is essential for startup founders looking to attract investment through this scheme. To benefit from the scheme, your startup must meet the SEIS rules. By meeting the eligibility criteria and maintaining compliance with your use of SEIS qualifying investment, you can utilise the scheme to secure the funding you need to grow your business.
Seeking professional legal and financial advice can be crucial in helping you ensure a smooth capital-raising process. If you would like legal advice about the SEIS or fundraising for your startup, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
The Seed Enterprise Investment Scheme (SEIS) helps small, early-stage companies raise equity finance by offering tax relief to individual investors.
You should seek professional financial advice to ensure your investors can benefit from the scheme’s tax reliefs. An expert can assist you in determining if the scheme is suitable for your startup and what would be a qualifying investment.
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