A Practical Guide to SEIS.

Our FREE eBook guide will help you understand the EIS process.

• Which companies qualify as an EIS.
• Explanation of the tax benefits.
• How to get HMRC advance assurance.

Our eBook will save you valuable time and expense to get your  company approved by HMRC and more importantly, able to raise finance.

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SEIS Qualifying Company Conditions

To qualify for SEIS companies must meet a specific criteria in order to qualify for the scheme.

The conditions listed below must be met by a company to qualify for investment under SEIS, both at the time of the investment and throughout the three-year minimum holding period. If the company doesn't meet or maintain these conditions, the company will not be qualifying, and investors will lose and/or face clawback of the tax reliefs given:

• The date of incorporation or the first commercial sale occurring within the last two years.
• The company must not have been controlled by another company since the company’s date of incorporation.
• Have less than 25 full-time employees.
• Carry out a qualifying trade.
• Gross assets less than £200,000 before SEIS investment.
• Have not raised investment through the Enterprise Investment Scheme (EIS) or from a venture capital trust.
• The company cannot control another company other than a qualifying subsidiary.
• If applicable, non-qualifying trades carried out by a subsidiary must not account for more than 20% of the group’s overall trade.
• The company cannot be controlled by another company, meaning another company should not own over 30% of the company’s shares.
• Not be listed on a recognised stock exchange, excluding the Alternative Investment Market.
• A permanent establishment in the UK. 
• Maximum £150,000 SEIS investment 
• The funds must be spent within two years of the investment.
• Be able to demonstrate growth and development in the future.
• Shares must be full-risk ordinary shares with no preferential arrangements in place.
• There must be no capital preservation provisions such as joint venture partnerships in place.

Date of First Commercial Sale

The company must receive investment under SEIS within 2 years of its first commercial sale or incorporation.

To qualify for SEIS a company’s first commerical trading date must be within the last two-years. This date tends to be near a company’s date of incorporation; companies can use either the date of commencement of trade or the date the business was incorporated, rather than the date of the first commercial sale.

In the SEIS application, HMRC will ask for both the date of incorporation and date of the company's first commercial trading date. If a company isn't sure of this date they should attempt to quantify it, be sure to put the trading date before the date the company first received revenue. If HMRC has any reason to doubt the date the company begun trading, it will look for information both in the documents provided and that available online. If the seed company has not yet begun to trade, state that in the application and that the investment raised will be used in the preparation to trade.

There are no exceptions to the two-year rule under SEIS, if the company is over two years old and the company has been trading for more than two years, a company may be eligible to qualify for the Enterprise Investment Scheme (EIS).

Maximum Employee Numbers

To qualify the company must have less than 25 full-time employees when shares are issued.

Before the company issues shares, they should have 24 full-time employees or less to qualify for SEIS. HMRC will confirm the number of full-time employees the company has at the time of investment, they will look at the company's PAYE payroll scheme to determine this.  

The company should include the number of employees in their cover letter as part of their application, and whether they plan to hire additional employees following the investment. Be aware subcontractor and consultants are not employees, so don't include them in employee numbers.

Qualifying Trades

Some trades at first glance may not appear to qualify for SEIS but upon extensive analysis may prove eligible. 

Companies must either exist to carry out a qualifying trade or else be the parent company of a trading group that conducts qualifying trades, there must be no “arrangements” in existence for the company to become a subsidiary of, or be controlled by, another company. 

A trading group is a group in which, directly or indirectly, owns more than 50% of the shares of each subsidiary held as a member of the group, but any subsidiary employing any of the money raised by the issue of shares must be a qualifying 90% owned subsidiary. Non-qualifying trading activities must not be a substantial part of the group's overall trade. HMRC classify's substantial as 20% of the group's overall trade, companies will have to demonstrate how it's non-qualifying trade is not substantial in the application. Companies should determine whether they can stay below the 20% mark as they will need to maintain this until after the three-year minimum holding period.

Most trades are qualifying trades for SEIS purposes, but the following are excluded and therefore do not qualify:

• Dealing in land, in commodities or futures or shares, securities or other financial instruments;
• Dealing in goods otherwise than in the course of an ordinary trade of wholesale or retail distribution;
• Banking, insurance, money-lending, debt-factoring, hire-purchase financing or other financial activities;
• Leasing (including letting ships on charter or other assets on hire);
• Receiving royalties or licence fees (subject to the exception relating to self-generated intellectual property);
• Providing legal or accountancy services;
• Farming and market gardening;
• Holding, managing or occupying woodlands, any other forestry activities or timber production;
• Property development;
• shipbuilding;
• producing coal and/or steel;
• Operating or managing hotels or comparable establishments or managing property used as a hotel or comparable establishment;
• Operating or managing nursing homes or residential care homes or managing property used as a nursing home or residential care home;
• Generation or export of electricity or power, both renewable and non-renewable;
• Production of gas or fuel; and
• Providing services to another person where that person's trade consists, to a substantial extent, of excluded activities, and the person controlling that trade also controls the company providing the services.

The qualifying business activity or to which that activity relates must be carried on for at least 4 months by the time the company issues the shares or a qualifying 90% subsidiary of that company.

Gross assets

Less than £200,000 of gross assets before issuing shares.

Before SEIS, gross assets must be less than £200,000 before shares are issued to qualify. The investment received under SEIS is not included in the gross assets test performed by HMRC, gross assets include fixed tangible assets, current assets and intangible assets. A company's gross assets will be demonstrated in the financials the company provides along with its application.

Company Structure

A company must be independent and not be controlled or a subsidiary of another company.

HMRC requires companies applying for SEIS to be independent, this means the company must not be controlled by another company. Under SEIS, parent/holding companies with a subsidiary(s) need to own over 90% of the shares to qualify and the parent company can be the only one in the group to receive SEIS investment as subsidiaries won’t qualify.

Unquoted Requirement

SEIS companies cannot be listed or have plans to be listed on a recognised stock exchange.

There must be no plans for companies applying for SEIS to be quoted on a recognised stock exchange. The Alternative Investment Market (AIM) is not a recognised stock exchange under SEIS, a company can be quoted in AIM and still qualify for SEIS investment.

One of the exits available to SEIS investors after the minimum holding period is for the company to become listed on a recognised stock exchange. Once the company is listed on a recognised stock exchange it is no longer qualifying, if the company becomes listed on a recognised stock exchange before the three-year minimum holding period, HMRC will clawback investors tax reliefs.

Permanent Establishment Condition

The tax reliefs are available to UK taxpayers only; however, companies incorporated outside of the UK can raise investment.

Company’s applying for SEIS must have a location of trade in the UK, where a considerable part of the business is conducted. Under SEIS this means a company must either have a permanent location (branch/management location) or a UK qualifying agent (based in the UK). UK incorporated companies will tend to meet this condition automatically as they usually have either a UK agent or UK registered office address. Companies from abroad seeking to raise money under SEIS will need to meet the permanent establishment condition to qualify for SEIS investment.

A foreign company must register with Companies House if they plan to set up a place of business in the UK or if an element of it is carried out somewhere in the UK. Foreign companies will need to complete a Companies House OS IN01 form and submit their constitution documents to register their UK branch or agent.

Funds Raised

Companies can raise up to £150,000 maximum under SEIS.

SEIS qualifying companies cannot raise more than £150,000 under SEIS, State Aid rules restrict companies receiving more than £150,000 under SEIS and State Aid received within the previous three years is included in this total. The money companies raise under SEIS cannot be used to buy all or part of another business, it must be used to grow or develop the business. All the money raised must be spent on a qualifying business activity within three years of the date of issue of the SEIS-qualifying shares.

Share Subscription Conditions

The SEIS shares must be paid up in full, in cash, before they’re issued.

SEIS shares must be paid in full and in cash in the company's bank account when issued. When submitting the company's SEIS1 application the company should also submit a copy of their bank statement, demonstrating to HMRC the shares were paid in full before they were issued. SEIS qualifying shares must be full-risk ordinary shares with no preferential or redemption rights or carry special rights to company assets.

There must be no arrangement in place for share capital preservation or pre-arranged exits for investors to get their money back. HMRC will not accept any reciprocal arrangements in place, where two company founders agree to purchase shares from each other’s business to benefit from SEIS tax reliefs.

Risk to Capital

SEIS companies are required to demonstrate significant risk plus growth and development in their application.

The Risk to Capital condition introduced by HMRC in 2018 has two parts:

1. Growth and Development: The company must have the objective to grow and develop in the long-term.
2. Significant Risk: There must be a considerable risk that investors will lose their investment.
   

The Risk to Capital condition ensures companies carry out the appropriate growth and risk that Venture Capital Schemes were created to support. Some factors to consider regarding this condition includes the number of employees, company assets and the industry. A company should perform a SWOT analysis to assess its strengths, weaknesses, opportunities and threats, providing a clear view of its risks to capital to HMRC.

Financial Health

Companies cannot receive SEIS investment if they are facing financial difficulty at the time of investment.

Financial difficulty is where the company is unable to meet its debts when they are due, or when the liabilities of a company outweighs their assets, depending on the result of a balance sheet test. HMRC will consider a company to be in financial difficulty if:

• The company cannot pay their debts, as and when they fall due.
• The value of the company’s liabilities is greater than its assets, taking into consideration it's contingent and prospective liabilities (the “balance sheet test”).
• The company has been trading more than seven years and more than half of its subscribed share capital has been wiped out as a result of accumulated losses, it is regarded as being in financial difficulty

Companies should not mis-lead HMRC regarding their financial situation, or it may potentially result in investors not being able to get the tax reliefs offered by the Scheme.

Continuous Period

The conditions to qualify for SEIS must be met throughout the three-years following the issuance of shares.

The company must follow the SEIS rules for at least 3 years after the investment is made - otherwise, tax relief will be withdrawn from investors. If at any point a company fails to meet any of these conditions tax relief will be withdrawn, and companies may face litigation from angry investors.

Companies should understand that unless drastic changes occur from the time HMRC grants it's qualifying status, it is unlikely a company will suddenly no longer qualify for SEIS. Such drastic changes include but are not limited to, changing the trade of the firm or it becoming a subsidiary of another company. Companies must tell HMRC if they no longer meet the qualifying conditions within 60 days. HMRC will then make a judgement to determine if the company doesn't meet SEIS requirements, HMRC will communicate their decision explaining why. Should the decision not be favorable companies can ask HMRC to review this decision and/or appeal against it.

Disqualifying Arrangements

HMRC will not accept companies that would not exist in the first place without the tax relief for investors.

SEIS reliefs cannot be used as tax mitigation or as an avoidance product, companies under SEIS must have a commercial purpose and not be set up solely for the benefits of tax-advantaged finance. Following the issuance of shares, there cannot be

• any protection for the investment or protection for the investor from risk
• the intent to sell the shares at the completion of, or throughout the investment period
• activities to let an investor benefit in a way the scheme does not intend
• a reciprocal agreement where the companies invest back in an investor’s company to also gain tax relief

SEIS Investor Qualifying Conditions

Along with company conditions, HMRC also has conditions for which investors must meet to qualify for tax reliefs.

Investors must meet the following conditions in order to qualify as an SEIS investor:

• Investors must be UK taxpayers;
• Investors can invest a maximum of £100,000 in SEIS investments per tax year;
• SEIS shares must be held for a minimum holding period of three years from the time of investment, investors who divest prior to the three year period will face clawback of tax reliefs;
• Investors cannot have a connection to the company, such as being an employee, family member (excluding siblings), paid director, etc;
• Investors cannot hold more than 30% of the company’s share capital to qualify for SEIS;
• Investors cannot qualify as an SEIS investor if they have previously invested in the company.

The conditions listed above must be met to qualify for investment under SEIS at the time of the investment and throughout the three-year minimum holding period. If investors don't maintain these condition, investors will no longer be qualifying and will lose and/or face clawback of the tax reliefs given. Should at any point an investor becomes ineligible they should inform HMRC as soon as possible.

Connected Parties

HMRC guidelines constitute connected parties as having either a financial interest in the investee company or being connected through employment. 

A financial interest in the company is construed as having more than 30% of the shares or voting rights in the company. This requirement applies both two years before the subscription and three years after the issue. Any rights to shares and/or assets carried by an associate during a wind up of trade will also be taken into consideration by HMRC. Associates include immediate family members, such as spouses, parents, grandparent, children and grandchildren (siblings are not considered as connected parties by HMRC). 

From low-level employees to company directors, if an individual is employed by a company they are connected to the business and will not be eligible for SEIS tax reliefs. If an investors associate, per the above, is employed by the investee company the investor will not qualify for tax reliefs, this applies both two years before share subscription and three years after it. 

The only exception to connected parties is for Business Angels. Relief will not be withdrawn if a business angel who was initially an unpaid director then becomes a paid director.

Speculative Applications

From the 2nd January 2018, HMRC is not accepting SEIS and/or EIS advance assurance applications which they consider to be speculative.

Any company or agent making an application for SEIS and/or EIS advance assurance now needs to reassure HMRC that the application is not speculative and that the company has potential investors, therefore implying that the company has the potential of getting investment if it obtains advance assurance. To avoid speculative applications companies should provide a list of at least six names and addresses of potential investors, or provide a letter of intent from a fund or crowdfunding platform.