Raising investment is always a top priority for any startup, but as a founder, you are also focused on turning your innovative idea into a viable, scalable business. First-time founders can find the multitude of responsibilities overwhelming, especially if they know where to start. That’s why here’s important information about how you can secure your first round of funding through the Seed Enterprise Investment Scheme (SEIS).
What is SEIS?
SEIS, or Seed Enterprise Investment Scheme, is a UK government-backed tax scheme that aims to support qualified early-stage start-ups by helping them attract investment from angel investors. In short, ensuring your company qualifies for SEIS will make it much easier for you to find investors.
How does SEIS work?
SEIS helps founders secure support by offering generous incentives to angel investors willing to invest in a high-risk startup. To ensure SEIS tax relief benefits continue to be available to investors, certain eligibility requirements apply to both your company and investors. Failure by either party will result in the deprivation of tax benefits.
What do investors get from SEIS?
The main benefit of SEIS for investors is that it offers them significant tax relief on their investment:
- Firstly, a 50% income tax relief can be claimed on the amount invested up to a maximum of £100,000 in a given tax year. Additionally, this tax break can be rolled over to a previous tax year for an immediate tax refund.
- Secondly, any gain from investing in your company is exempt from Capital Gains Tax (CGT) when the investor disposes of their shares (provided the relevant holding period is met).
- Thirdly, if the investor has disposed of other assets that attract capital gains tax, the investor can claim a capital gains tax reduction of 50% if the proceeds from these disposals are reinvested in SEIS shares.
- Fourthly, in the event that the investment is loss-making or the business fails, there is an option to claim loss relief on the income of the remaining 50% of the investment that did not benefit from the initial income tax relief or capital gains tax relief on future profits.
- Finally, SEIS shares typically qualify for the business property exemption from inheritance tax, provided they were held by the deceased for at least two years.
As you can see, ensuring your company is doing SEIS right can significantly increase your attractiveness to investors.
How much can I collect from SEIS?
Whilst there is no limit to the number of fundraising rounds you can pursue as a SEIS eligible business, there is a lifetime limit on the amount of capital you can raise. The maximum limit is £250,000. Additionally, the lifetime limit is even further limited in time, as you can only make SEIS investments for three years from the date your company begins trading. The investments received must be fully spent within 3 years of the shares being issued to investors. From an investor perspective, a maximum of £100,000 per tax year can be invested in SEIS companies, which can be split across multiple companies if desired. So, you should keep all of this in mind when it comes to planning your fundraising strategy.
Another important note to keep in mind is that your SEIS lifetime limit may be exhausted if you receive de minimis aid, such as: B. received government subsidies. For example, if you received a de minimis grant of £10,000, your total SEIS lifetime limit would be reduced by that amount to £240,000. In contrast, a de minimis grant you receive after you have fully exhausted your SEIS lifetime limit has no effect. Therefore, the timing of financing is crucial. For this reason, we strongly recommend working with an experienced advisor who can help you strategize and sequence various funding sources to ensure you do not inadvertently limit your SEIS capacity or broader fundraising options.
How does my company qualify for SEIS?
To qualify for SEIS, your company must meet all the qualifying conditions — not only on the day the SEIS shares are issued to investors, but also for a period of three years thereafter. The rules are deliberately strict as SEIS is intended to support genuine high-risk early-stage companies in need of financial support, rather than established companies masquerading as start-ups.
As a UK Government-backed scheme, SEIS is only available to UK businesses. Your company must have a permanent base in the UK and conduct most of its business from here. However, that doesn’t mean you can’t have locations in other locations if necessary and there are no restrictions on where your customers can be located (you can sell your goods or services worldwide).
The timing is crucial as SEIS specifically targets companies that are still in their infancy. This means that your company must not have been trading for more than three years at the time the SEIS shares are issued. So if SEIS financing is part of your growth strategy, you need to prepare for it early on as part of your business plan.
It is also important to understand that not every type of business activity qualifies under SEIS. HMRC excludes certain transactions as they are not considered to be truly high risk. These include, for example, trading in land or real estate, asset-backed industries such as agriculture, coal or steel production or shipbuilding, as well as lower-risk sectors such as professional services, leasing and royalty companies, hospitality and financial activities such as banking or insurance. This is not an exhaustive list, but it illustrates the types of activities that are not covered by the program. Full instructions can be found in HMRC Handbook.
In addition, there are clear size and balance sheet limits to be a SEIS eligible company. At the time of investment you must not employ more than 25 full-time staff or have gross assets of more than £325,000. This can sometimes be difficult for founders to manage, especially if you are in a phase of accelerated growth or dynamic growth.
Autonomy is another important requirement. Your company must not be controlled by another company since inception and may not control another company unless that company is a qualified subsidiary. The rules for subsidiaries are detailed and strictly defined, so advice from specialists in this area is particularly valuable.
After all, your company doesn’t have to be listed on the stock exchange. At the time the SEIS shares are issued, the company may not be traded on a recognized stock exchange, nor does it have any immediate intention to list. This does not rule out an IPO or exit in the future — it simply means that the company must still be firmly in its early growth phase at the time of the SEIS investment being sought.
What could cause my company to be excluded from SEIS?
Even if you meet the basic eligibility requirements above, you could still inadvertently disqualify yourself from SEIS. A common pitfall for first-time founders is prior funding. If you have already secured investment through EIS (Enterprise Investment Scheme) or a venture capital scheme, you will disqualify your company from SEIS. However, the interesting thing is that it Is It is certainly possible to receive funding from all three programs, but only if the structure and timing are right.
Another common and easy mistake is that companies do not comply with all requirements for the entire three-year period. With so many rules and boundaries to navigate, it can be easy to cross one or more limitations while focusing on scaling your business.
It is also important to know how and when to use SEIS funds. HMRC requires that any investment raised must be spent on qualifying business activities within three years of the share issue. Qualifying business activities do not include the repayment of existing loans, the use of funds to pay dividends to shareholders, the financing of operations outside the UK or the acquisition of other businesses. This shows the importance of carefully planning how you will use the investment within the allotted time frame.
How to apply for SEIS
Now that we have covered the more complex elements of SEIS, which include the eligibility criteria, applying for SEIS is comparatively simple. The first step is usually to obtain an Advanced Assurance from HMRC. This is confirmation that you can offer investors that your company qualifies for the advantageous SEIS benefits. Although it is an optional step, it is incredibly valuable and should not be overlooked as you may have a harder time attracting investors without this step.
Once you have secured your investors and received cash financing, you need to issue the shares. Once this is done, you can complete the SEIS1 form (also called a compliance statement) and send it to HMRC. This documents all the necessary details that HMRC need to monitor and ensure compliance with the SEIS rules by the company and the investor.
You will need to wait for HMRC to approve the SEIS1 form, but when they do they will send you back a SEIS3 form as confirmation. You as a business will get this back, but it is your responsibility to then pass it on to your investors so that they can claim their tax relief.
Make sure you keep careful records and supporting documents over the next three years to demonstrate that you are complying with the terms of SEIS in case HMRC or investors question this.
Get help with your SEIS application
Managing all SEIS requirements can be challenging and adhering to the boundaries is crucial. Therefore, by working with our experienced accountants, you can not only ensure that your compliance forms are completed correctly, but also assist you with your overall financing strategy to ensure you make the most of all available opportunities to support the growth of your business. Arrange a consultation with a member of our team by filling out the online form.
