What is the Seed Enterprise Investment Scheme (SEIS)?

The Seed Enterprise Investment Scheme (SEIS) offers great tax efficient benefits to investors in return for investment in small and early-stage start-up businesses.

We’ve split this article into two parts: firstly, what companies need to know and do; secondly, important information for investors plus next steps.

What do companies need to know about the Seed Enterprise Investment Scheme (SEIS)?

If you’re a company, find out more about the SEIS (what it is and how you can access it). The SEIS is a government investment programme that gives investors generous tax breaks to invest in new UK businesses.

Which companies are eligible for investment?

In order to be eligible for the SEIS, the company or group of companies must:

• not have gross assets over £200,000 (increasing to £350,000 from April 2023) when the shares are issued

• not be a member of a partnership

• have fewer than 25 full-time equivalent employees in total when the shares are issued

• meet the financial health requirement at the date the shares are issued (i.e. not be in financial difficulty)

• first commercial sale must have been in the last 2 years (increasing to 3 years from April 2022), or not yet trading.

The company must have spent at least 70% of the money raised by the issue of shares or the new qualifying trade has been carried on for at least four months in order to make the application.

The company cannot:

• be part of any arrangements to become a quoted company or a subsidiary of one at the time of the share issue

• control another company unless that company is a qualifying subsidiary

• be controlled by another company since the date of your company being incorporated.

The company must be carrying out a qualifying trade from the UK. Some examples of non-qualifying trades include:

• legal and financial services

• property development

• banking, insurance, debt or financing services

• dealing in land, in commodities or futures or in shares, securities or other financial instruments.

• [link here for the full list - https://www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual/vcm3010]

What are the limits for investment?

The company can raise a maximum of £250,000 (increased from £150,000 pre 1 April 2023).

How can I spend the investment?

The money raised must be spent within 3 years of the share issue on either:

• a qualifying trade

• preparing to carry out a qualifying trade

• research and development that’s expected to lead to a qualifying trade.

What type of shares can you issue?

Shares must be paid up in full, in cash, on issue. They can’t carry any preferential rights and must not be redeemable.

What is the risk to capital condition?

In order to be eligible for the scheme, the company needs to show that the investment meets the risk to capital condition. This means that:

• the company must use the money for growth and development, this includes growing revenue, staff and customer numbers.

• the investment should be a risk to the investor’s capital. 

The investment should carry a risk that the investor will lose more capital than they are likely to gain as a net return. The net return includes:

• income from dividends

• capital growth

• up-front tax relief

The investment will not meet the risk to capital condition if there are any risk reducing arrangement in place that can result in an investor:

• getting priority over other investors

• being able to withdraw their money as soon as possible

• protecting their money so that other investors money is used first.

What is the process to become a qualifying company?

Ahead of the formal application, a company can apply for advance assurance from HMRC that the company qualifies. This can be used to show potential investors that an investment may qualify for a scheme. The application must be made for specific share issues and the advance assurance only applies to that particular issue.

There are three steps to the formal process:

• Step 1: Completion of the form SEIS1

• Step 2: HMRC will review the application and if successful will issue a SEIS2 form which will include a unique investment reference (UIR)

• Step 3: The company can then issue SEIS3 compliance certificate to each investor

How can we help?

Advance assurance can be sought from HMRC to confirm you meet the qualifying criteria ahead of the application which we can prepare.

We can also complete the compliance statement which is required in order to become an approved investment, including support with the completion of the required documentation that needs to be submitted alongside the form, which includes the documents below:

• the business plan and financial forecasts

• a copy of the latest accounts

• an explanation of how you meet the risk to capital condition

• details of all trading and activities to be carried out, and how much you expect to spend on each activity

• an up to date copy of the memorandum and articles of association

• the information memorandum, prospectus or other documents used to explain the fundraising proposal to your investors

• details of any other agreements between your company and the shareholder

• a list of the amounts, dates and venture capital schemes under which you’ve previously received investment

• any other documents to show you meet the qualifying conditions

What do investors need to know about the Seed Enterprise Investment Scheme (SEIS)?

If you’re an investor, find out more about the SEIS (what it is and how you can access it). The SEIS is a UK tax relief scheme that rewards investment in early-stage startups.

What are the income tax benefits of making a qualifying investment?

Income tax relief is available at 50% of the qualifying investment. The maximum investment on which an investor may claim relief for any year is £200,000.

An investor can also elect to carry back the qualifying investment to the previous tax year, up to the annual limit of £200,000.

Time limit for making the claim is no later than five years from the normal self-assessment filing date for the tax year.

What happens if I sell my SEIS shares for a profit?

Provided you have claimed the income tax relief, if SEIS qualifying shares are sold 3 years after issue, the capital gain may be exempt from CGT.

What happens if I make a loss on my SEIS investment?

The capital loss can be carried forward to be offset against any future capital gains tax arising. However, the loss is reduced by the amount of income tax relief already claimed on the shares.

Any other tax benefits?

Reinvestment relief can also be claimed. This can reduce a capital gain arising on the sale of an asset when the investor makes an investment that qualifies for SEIS income tax relief. The relief is available on up to 50% of the available SEIS expenditure. This relief is only available in the year in which the income tax relief is claimed (e.g. if a carry back claim is made, the reinvestment relief can only be claimed against gains arising in the previous year).

Provided the SEIS shares are disposed of after a three year holding, the gain remains exempt for CGT.

Am I eligible to receive the SEIS tax benefits?

You are a qualifying investor providing you meet the following criteria:

• Not an employee/director of the company

• No substantial interest in the issuing company (Not possessing more than 30% of the company’s share capital)

• No related investment arrangements 

• No linked loans 

• No tax avoidance motive

Further reading on the best accounting software for small businesses

From Gov.uk: Apply to use the Seed Enterprise Investment Scheme

From SEIS: Search for Seed Enterprise Investment Scheme Companies

From British Business Bank: What is the Seed Enterprise Investment Scheme (SEIS)?