Start-Up’s guide to the Seed Enterprise Investment Scheme (SEIS)

Are you an early-stage start-up seeking funding? The Seed Enterprise Investment Scheme (SEIS) can be an ideal choice for you.

SEIS is a UK government plan created to promote investment in early-stage and expanding businesses by providing tax incentives to investors.

This post will provide a detailed guide to SEIS, such as eligibility criteria, tax advantages, investment limits, and best practices.

Whether you’re a business owner looking for funding or an investor looking for an opportunity, this guide helps you traverse the SEIS landscape and make intelligent investment choices.

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So, let’s delve deeper and learn everything there is to know about SEIS!

Table of content

Basic rules businesses should know about SEIS
What must the funds raised by SEIS be used for?
What are the upcoming SEIS changes?
Final thoughts

Basic rules businesses should know about SEIS

To be eligible for SEIS, the business must be a UK-based, unquoted firm with gross assets of less than £200,000 before investing capital.

The company must have fewer than 25 full-time staff members, and the shares issued should be fully paid and not carry any preferential rights to profits or assets.

Tax relief
One of the important benefits of SEIS is the tax relief investment options. Shareholders can claim 50% income tax relief on their SEIS invested capital, with a maximum benefit of £100,000 per tax year.

It implies that if you invest £10,000 in a SEIS-qualifying firm, you can decrease your income tax bill by £5,000.

However, the tax relief is governed by various conditions, such as the shareholder must have paid sufficient income tax in the correct tax year to cover the relief claimed.

Holding period
Investors should hold their SEIS shares for at least three years to retain the tax relief. If you sell your SEIS stocks before the completion of the three years, you may have to pay back some or all of the tax relief claimed.

Investing in early-stage businesses is risky, and there is no assurance that your money invested will generate a return.

The company’s growth will depend on several variables, such as the strength of the management team, the quality of the product or service, and economic conditions.

It’s essential only to invest what you can afford to spend and pursue independent financial advice before investing in SEIS. Moreover, SEIS investments are illiquid and cannot be sold, so you should be willing to keep your investment for a prolonged duration.

Loss relief
When investing in startup businesses, it’s important to know that the business may not succeed, and shareholders may lose some or all of their investment.

However, the UK government provides some tax relief to mitigate these risks through loss relief.

If the SEIS-qualifying business fails, shareholders may be eligible to claim loss relief against their capital gains tax liability or income tax liability.

Loss relief allows the investors to offset the loss against their taxable earnings or capital gains in the year the loss caused or in a future year.

Investor protection
SEIS-qualifying businesses are not subject to the same regulations as publicly traded companies, implying that investors may have limited protection against theft or other misconduct.

As such, shareholders should carefully examine the business’s leadership team and government structure before investing.

When investing in SEIS-qualifying businesses, shareholders should be aware that they are investing in early-stage companies that may be at a greater risk of failure.

These businesses may need a more robust track record of economic performance or a well-established governance structure. Consequently, shareholders may have minimal protection if the company fails or fraudulent activity occurs.

What must the funds raised by SEIS be used for?

The funds earned by SEIS-qualifying businesses must be used for qualifying business operations. Some of these include:

● The design of a new product, procedure, or service.
● The growth of an existing model, system, or service.
● The advancement or improvement of a production process.
● The provision of a service that enhances the value of a product or procedure.
● The provision of a service in a qualified trade sector.
● The research and development of a new product, process, or service.

SEIS-qualifying firms must use at least 70% of the revenue collected for qualifying business operations within three years of the investment date. Startups should fulfil this condition to avoid a denial of tax relief for investors.

In addition, SEIS finances should not be used to fund the purchase of existing shares or pay back existing debts. SEIS-qualifying businesses must keep records of the use of revenue collected under the scheme and provide these documents to HM Revenue & Customs upon request.

Need Startup Accountant

Work with a London-based accountant for tax, accounting, payroll, & EIS/ SEIS needs.

Have a question? Call us on
0203 900 3500
Monday to Friday 9am – 5pm

What are the upcoming SEIS changes?

Starting April 6, 2023, substantial changes will be made to the SEIS investment plan. Under the proposed rules, eligible companies can raise to £250,000 per year instead of the prior limit of £150,000, and can do so within the first three years of trading rather than the current two.

Moreover, to be eligible for SEIS, businesses should have less than £350,000 in gross assets as compared to the current threshold of £200,000. Even though the modifications won’t take effect until April 2023, businesses may already benefit from them, as the SEIS law applies from the date of share issuance.

Therefore, companies can consider raising investment opportunities now and issuing shares after April 6, 2023, to benefit from the newly implemented rules.

Final thoughts

Getting SEIS compliance can be a complex and uncertain process that can feel overwhelming. Moreover, HMRC has initiated an Advance Assurance facility to assist in simplifying the procedure for both investors and entrepreneurs.

It’s worth noting that the SEIS regulations and eligibility criteria may change with time, but the scheme’s benefits remain appealing to both investors and entrepreneurs.

These tax incentives encourage entrepreneurs and increase investment in early-stage UK businesses, making SEIS an attractive proposition for both shareholders and start-ups seeking funding.

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