The Seed Enterprise Investment Scheme (SEIS) was recently developed by the UK government to act as an incentive for investors to invest in very small businesses, new businesses. SEIS is similar in many ways to the EIS discussed in the previous chapter, but it consists of some key difference as well.
Income Tax Relief Offered by SEIS
Individuals who make SEIS qualifying investments can receive income tax relief equal to 50% of investment contributions up to £100,000 (meaning that they will receive tax reliefs of up to £50,000). These investors can apply the relief against their tax payable for the year in which the investment was made, the previous year, or they can split the relief between the two years. Investments must be made for new shares that are issued between 6 April 2012 and 5 April 2017.
Capital Gains Tax Relief Offered by SEIS
- If a share investment benefits from SEIS income tax relief, it will also benefit from CGT tax relief upon the disposal of the share, as long as the share has been held for at least three years and it has upheld all SEIS requirements during the qualifying period
- If the shares are disposed of at a loss, the loss is reduced for CGT purposes in order to account for any income tax incurred. In some cases, the allowable loss can be set against income.
Conditions and Eligibility
Who can benefit from SEIS?
- Qualifying investors can benefit from the tax relief provided by SEIS as long as they are subscribing to relevant shares for qualifying companies that meet all applicable conditions.
Who is a qualifying investor?
- A qualifying investor must be making the contribution on their own behalf.
- The investor (and their associates) cannot be an employee of the company from the time that the share is issued, to any time within the three-year qualifying period.
- Company directors are not considered employees for this purpose. For this reason, a qualifying company director or executive director can benefit from a SEIS However, unless the company director is unpaid, they may be able to benefit more from EIS. The regulations regarding this position can be complicated and expert advice may be needed to determine which options is best for you.
- The investor cannot have a “substantial interest” in the company in question during the qualifying period. This means that the investor cannot individually or jointly own more than 30% of the company’s ordinary share capital, they cannot hold more than 30% of the company’s voting rights, and they cannot be promised more than 30% of the company’s assets in the event of a winding up.
What constitutes a relevant share?
- Relevant shares are shares that do not offer preferential rights to company’s assets in the event of a winding up, and follow strict rules when it comes to dividend distributions (if any apply).
- The share must be fully paid in cash upon allocation
- The share must be issued in order to raise funds for qualifying business activities by the issuing company or a 90% subsidiary. Qualifying business activities constitute those that are to be carried out on a ‘new qualifying trade’ (see more information below) or activities related to the research and development of new qualifying trades.
SEIS relies on the concept of ‘New qualifying trades’, which include the following features:
- The new qualifying trade does not include ‘excluded activities’. Excluded activities are the same for EIS and SEIS, and a list of them is provided earlier in this chapter.
- The trade is less than two years old. If the trade was in operation more than two years before the shares were issued, then the company does not qualify as a ‘new qualifying trade’ and it cannot benefit from SEIS tax relief.
- The trade must be the first trade conducted by the company/group. If the company or its subsidiaries carried out any other form of trade prior to the trade in question, it does not qualify as a ‘new qualifying trade’ and SEIS tax relief does not apply.
What are the requirements for a qualifying company?
- The company must be based on a new qualifying trade. If the company is part of a group, then the larger group cannot have a substantial trade in non-qualifying activities—meaning that the operations of the larger group cannot constitute more than 20% non-qualifying activities according to EIS and SEIS or non-trading operations.
- The company/group cannot have gross assets valuing more than £200,000 before the issue of shares
- The company/group must have at least 25 full-time employees when the shares are issued
- The company cannot have raised funds through EIS or the Venture Capital Trust before or on the same day that SEIS related the shares are issued
- The company must be autonomous, meaning that it is not controlled by any outside company or unrelated individual
- The company cannot have a non-qualifying subsidiary. All subsidiaries must be genuine.
- The company must have a permanent UK address
- It must be an “unquoted company”
- In accordance with European Commission guidelines, the company cannot be experiencing financial difficulty at the time that the shares are allocated
- The qualifying business activities must be conducted by the company issuing the shares, or a 90% subsidiary, and neither the subsidiary nor the company can be in a partnership.
The timeframe for which these conditions must be satisfied varies on an individual basis.
Additional Conditions Applicable
- The funds accumulated via SEIS must be spent within 3 years on qualifying business activities.
- Companies can incur a maximum of £150,000 through SEIS; but while there is no annual threshold cap, there is a cap on each company.
- Investors can only claim tax relief upon receiving a “compliance certificate” from the issuing company, and the issuing company can only apply to the HMRC for the certificate once the following conditions are met;
- A minimum of 70% of the investment has been spent
- The new qualifying trade has been carried out for a minimum of four months
- Several anti-avoidance provisions apply, including
- The investment must be incurred for genuine commercial reasons
- The company cannot issue any protection to investors against ordinary investment risks (like anti-dilution rights)
Disqualification of tax reliefs
- If the company disposes of the shares before the three year qualifying period is over, then income tax relief may be forfeited or reduced and any gains will be subject to CGT as per usual.
- Income tax relief may also be lost or reduced if the investor is granted value from the company or its subsidiaries (except for “excluded payments” or “insignificant” funds).