The SEIS Process
SEIS is administered by HMRC’s Venture Capital Reliefs Team and is who will be making a judgement on whether the company qualifies for SEIS.
Each application for SEIS typically takes a maximum of eight weeks to approve, however, this can depend on whether HMRC has any questions about the application. Some applications are simpler than others, HMRC may have questions seeking further clarification on whether a company meet’s one or more of the qualifying conditions which can delay being granted SEIS. Depending on whether a company goes through advance assurance there are four stages to SEIS:
Advance Assurance
Companies applying for SEIS are not required to go through advance assurance, but it is recommended to ensure there are no surprises for a company or its investors. Companies planning to raise funds through SEIS and EIS in the future can apply for advance assurance of both in a single application, be sure to state the total combined amount the company plans to raise under both schemes in this application. Not all companies will file for advance assurance, but this will make a company more attractive to prospective investors. Advance assurance is essentially “pre-approval” from HMRC that the company meets the qualifying conditions at the time they submitted the application. Before starting the application, a company should have the following documentation and information:
- A valid Unique Tax Reference (UTR) and a Company Reference Number (CRN).
- Latest company account’s and any accounts for any subsidiaries, if applicable.
- The business plan, including financial forecasts.
- Details on how the company will use the funds raised under SEIS and EIS.
- An explanation of how the company meets the risk to capital condition.
- A schedule of all tax-advantaged investments received by the company, including the amount, date and scheme under which each investment was received.
- An up-to-date copy of the Memorandum and Articles of Association, with a detailed explanation of any changes/modifications to be made.
- Details of any shareholder agreement or any other subscription agreement the company intends on establishing.
- The latest draft of any prospectus, information memorandum, brochure or similar document relating to the relevant fundraising or offer to be issued to potential investors, if applicable.
- Information on any financial support received by the company that constitutes EU State Aid.
Once a company has all the above documentation, they can then begin the process of filing for advance assurance with HMRC. Once this has been filed HMRC may come back with questions regarding details in the application to ensure that all conditions are met, and no disqualifying activities are occurring. If successful, HMRC will grant the company a provisional acceptance of the company’s eligibility for SEIS and EIS. Companies can then take this provisional acceptance to prospective investors; it will encourage them to invest and they will receive attractive SEIS tax reliefs in return.
SEIS1
Companies that apply for advance assurance first will tend to have a quicker and simpler application process when applying for SEIS1. This is due to having already complied/provided the necessary documentation needed by HMRC, and will therefore only need to provide documentation on any changes in the business and the issuance of shares. However, if a company has not sought advance assurance before issuing shares, they will need to provide more information for their SEIS1 compliance statement.
- A valid Unique Tax Reference (UTR) and a Company Reference Number (CRN)
- Latest company account’s and any accounts for any subsidiaries.
- The business plan, including financial forecasts.
- Details on how the company will use the funds raised under SEIS.
- An explanation of how the company meets the risk to capital condition
- A schedule of all tax-advantaged investments received by the company, including the amount, date and scheme under which each investment was received.
- An up-to-date copy of the Memorandum and Articles of Association, with a detailed explanation of any changes to be made.
- Details of any shareholder agreement or any other subscription agreement the company intends on establishing.
- The latest draft of any prospectus, information memorandum, brochure or similar document relating to the relevant fundraising or offer to be issued to potential investors.
- Information on any financial support received by the company that constitutes EU State Aid.
- A bank statement demonstrating the shares being paid in full.
The SEIS1 form must be submitted every time the company issues SEIS shares and should be submitted within two years in which the shares were issued or otherwise investors will not receive their tax reliefs. The company must meet either of the following criteria before submitting the SEIS1 form:
- At least 70% of the money raised by the relevant share issue has been spent for the qualifying business activity for which it was raised.
- Or the new qualifying trade which constitutes the qualifying business activity or to which that activity relates has been carried on by the company issuing the shares or a qualifying 90% subsidiary of that company for at least 4 months.
SEIS2
When HMRC approves the application, companies will receive an SEIS2, this is essentially confirmation from HMRC that the company meets the qualifying conditions. This lets companies know that the shares they issued have been authorised and SEIS3 forms can be issued to the investors recorded in the SEIS1 application.
SEIS3
Once a company receives confirmation from HMRC in the form of SEIS2, investors will be able to fill out SEIS3 which they receive from the investee companies or the HRMC website. The company uses the information from the SEIS2 document to fill out the SEIS3 form, such as the Unique Investment Reference (UIR) and the termination date for the shares. The investors can use the SEIS3 form to carry back their tax reliefs on page three and four. The SEIS3 forms will need to authorise by both a company representative and the investor before being submitted to HMRC.
Following the completion of the SEIS process, it is up to the SEIS qualifying company and it's investors to stay qualifying throughout the three-year holding period. Furthermore, if the company raises additional investment through SEIS they will have to do the SEIS1/SEIS2/SEIS3 process for each round of funding until the company raises up to £150,000 or until it is over two year since trading occurred.
EIS
Following SEIS or if the company has been trading for more than two years the company can then raise investment under the Enterprise Investment Scheme (EIS) some of the conditions include:
- Fewer than 250 employess
- Trading less than seven years
- Gross assets less than £15 million
- Maximum lifetime amount that can be raised under SEIS, EIS and Venture Capital Trusts is £12 million
For more information on the Enterprise Investment Scheme (EIS) have a look at Sapphire's EIS Pillar Page, Knowledge Centre or MoneyLab Blog. Furthermore, given the high likelihood of early-stage company's failing, investing across a range of qualifying companies through a collective investment undertaking allows the investor to take advantage of the lucrative tax reliefs, a fund allows the investor to achieve greater diversification within their portfolio. For more information on the Enterprise Investment Scheme (EIS) Funds have a look at Sapphire's EIS Fund Pillar Page.
Disclaimer
Please note that this is only a condensed summary of the taxation legislation and should not be construed as constituting advice which a potential investor should obtain from his or her own investment or taxation adviser. The value of any tax reliefs will depend on the individual circumstances of investors.
Sapphire Capital Partners LLP does not give tax advice and recommends that you consult a tax adviser if you are in any doubt about any of the technical aspects of the SEIS legislation.