SEIS: An Overview
What is SEIS and why should it interest you?
SEIS stands for Seed Enterprise Investment Scheme, a scheme which gives tax reliefs to individual investors for certain investments in unquoted companies. If your start-up or early stage business is looking for investment from individuals, being SEIS-compliant can help attract funding as it is a very tax-efficient way for them to invest
Relief 1: Income Tax
Provided that the investor holds qualifying shares for three years, the investor’s income tax liability is reduced by 50% of the sums invested, up to the annual investment limit (currently £100,000). The relief is available for the tax year in which the shares are issued but the investor may elect to treat the shares as having been issued in the previous tax year. By way of example, in the 2015 – 2016 tax year Adam invests £100,000 by way of subscription for new ordinary shares in a qualifying company. Adam’s income tax liability for 2015 – 2016 is reduced by £50,000 (50% of £100,000).
Relief 2: Capital Gains Tax
Provided that the investor holds qualifying shares for three years, the investor is exempt from any liability to pay capital gains tax on a disposal of the qualifying shares.
Genuine: The subscription must be made for genuine commercial reasons and not for tax avoidance purposes.
Time period for holding shares: To retain income tax relief and capital gains tax exemption, the shares must be held for at least three years.Cannot be connected: Neither the investor nor an associate of the investor must be connected with the issuing company. This means that:
- they cannot be an employee or director of the issuing company, any subsidiary or any partner of them (although note there are certain exemptions for unpaid directors);
- they cannot be a partner of the issuing company or any subsidiary;
- they cannot hold a material stake (ie. their shareholding must be under 30% of the ordinary share capital, 30% of the issued share capital or 30% of the voting rights) in the company or any subsidiary or otherwise control either of them (and note that holdings of shareholders who are related or partners in a partnership are aggregated when considering whether the threshold of 30%); and
- their share subscription must not be as a result of a reciprocal arrangement.
Conditions: Issuing Company
Unquoted: The issuing company must be unquoted at the time the shares are issued and there must not be any arrangements for it to become quoted.
Independence: From the date of issue of shares and for a period of three years post-issue, the issuing company must not be under the control of another company or a 51% subsidiary of another company.
Gross Assets Test: The value of the issuing company’s gross assets (or group’s assets if a parent company) must not exceed £200,000 immediately before the shares are issued.
Qualifying Trade: The issuing company must carry on a qualifying trade from the issue of shares and for a period of three years post-issue. The tax reliefs will be withdrawn if this condition ceases to be met at any time in the three years post-issue.
Permanent UK Establishment: The issuing company must have a permanent establishment in the UK from the date of issue and for a period of three years post-issue.
Employees: The issuing company must have fewer than 25 full-time employees or part-time equivalents.
Financial Limits: The issuing company cannot raise more than £150,000 through SEIS investments or other state aid.
There are a number of additional considerations where a parent company wishes to qualify for SEIS, which is beyond the scope of this note. If you are considering SEIS for a parent company please contact us for further details.
Advance Assurance: The issuing company can apply to the HMRC Small Company Enterprise Centre to obtain advance assurance. Whilst not strictly necessary to obtain advance assurance in order for the reliefs to be available, the assurance provides comfort to the issuing company that it’s proposed share issue satisfies the necessary criteria and, in turn, such comfort makes the issuing company attractive to investors.
Formal Approval and Issue of SEIS Certificates: The issuing company will need to apply for formal approval and request a compliances statement by submitting a compliance statement, form SEIS 1, confirming that the issue of shares met the SEIS qualifying conditions, to the HMRC Small Company Enterprise Centre. The compliance certificate will only be issued once it is confirmed that at least 70% of the money raised by the issue of shares to that investor has been spent on a qualifying business activity and that the new trade has been carried on for at least 4 months. Investors must claim SEIS relief before the fifth anniversary of the self-assessment filing date for the relevant tax year that the shares were issued in.
For further information about the SEIS, please do not hesitate to contact Kirsty Simmonds, or you can call us on 0345 070 6000.