SEIS in a nutshell
The seed enterprise investment scheme (SEIS) and enterprise investment scheme (EIS) are very similar schemes which offer substantial tax incentives to investors in companies which qualify. SEIS focuses investment in very early stage, new businesses that may face particular difficulties in raising finance as they are seen as being very high-risk.
The schemes are very similar to facilitate seamless growth through financing being raised first through SEIS and then further follow on financing being raised through EIS.
Which companies does SEIS help?
Companies must be qualifying companies in order to benefit from SEIS. These companies are ‘young’ and engaged in ‘new’ high-risk qualifying trades. This may often involve ‘knowledge intensive’ research and development with a high-risk of failure.
How does a company raise finance through SEIS?
Finance is raised by offering tax incentivised investment to private investors. The shares must be qualifying shares. There are several conditions that define what is a qualifying company, a qualifying share and a qualifying investor. The conditions are complex and rely on the submission of correct paperwork to HMRC at the correct stages.
Advance assurance can be sought from HMRC before the issue of shares, to gain comfort that the conditions will be met, but HMRC will not be held to that assurance if circumstances change.
What are the tax incentives offered by SEIS?
In summary, tax reliefs under SEIS are as follows:
- income tax relief for the investor of up to 50% of the amount invested (subject to an annual subscription limit)
- disposals of SEIS shares after three years may be free from capital gains tax
- losses on SEIS shares are allowable capital losses and may be offset against taxable income
- SEIS investments should qualify for IHT business property relief after two years’ ownership
- CGT reinvestment relief is offered on the disposal of any assets where the gains realised are reinvested under SEIS. 50% of the gain reinvested attracts exemption from CGT
How does the investor make the investment and claim the relief?
The investor subscribes for the shares either directly in the company and then applies to HMRC for the tax reliefs available.
The process for claiming tax relief is quite straightforward as it simply involves following a few steps which are detailed on the scheme certificates. The certificates are provided to the investor by the company after permission to do so has been received by HMRC.
Income tax relief is usually claimed in the tax year in which the qualifying shares are issued. However, it is also possible to carry back some relief, so planning to maximize the tax advantage over more than one tax year is important.
What if things go wrong after SEIS tax relief has been claimed?
The qualifying conditions are time sensitive in that they must be satisfied for certain periods if full relief is to be obtained. Failure to meet the conditions during the required time periods can lead to a clawback of relief.
Similarly gains reinvested through SEIS can become chargeable on the occurrence of a later chargeable event.
The company in receipt of the investment, and the investor, have a duty to notify HMRC if conditions are broken. Penalties can be imposed by HMRC if these obligations are not met.