But did not know where to ask.
The Seed Enterprise Investment Scheme (SEIS) was introduced in April 2012 to encourage investors to make investments in start-ups and early-stage companies. The SEIS Scheme allows qualifying companies which have been trading for less than two years to raise considerable capital to grow and develop their trade. This was done by the UK Government offering substantial tax reliefs to UK investors as incentives.
Under SEIS, qualified UK investors will benefit from
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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:
To qualify for SEIS a company’s first commercial trading date must be within the last two years, or not be trading yet. Companies can use either the date of commencement of trade when revenue was generated or when the business began marketing its product or service.
In the SEIS application, HMRC will ask for both the date of incorporation and the company's first commercial trading date, if applicable. If the 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. If HMRC has any reason to doubt the dates the company began trading, it will look for information both in the documents provided and what is available online.
There are no exceptions to the two-year rule under SEIS; if the company has been trading for more than two years, it will not qualify for SEIS. However, the company may be eligible for the Enterprise Investment Scheme (EIS).
Before the company issues shares, it must have less than 25 full-time employees 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 its 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 directors, subcontractors and consultants are not employees, so don't include them in employee numbers.
Companies must either exist to carry out a qualifying trade or be the parent company of a trading group that conducts qualifying trades. There must be no arrangements for the company to become a subsidiary of, or be controlled by, another company.
A trading group is a group that, directly or indirectly, owns more than 50% of the shares of each subsidiary held as a member of the group. Still, 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 classified substantial as 20% of the overall trade. Companies will have to demonstrate how its non-qualifying trade is not substantial in its 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:
Gross assets must be less than £200,000 before issuing shares 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 with its application.
HMRC requires companies applying for SEIS to be independent; another company must not control the company. HMRC will assess control in terms of ownership and if the potential controller is a creditor of the company.
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 on the AIM and qualify for SEIS investment.
One of the exits available to SEIS investors after the minimum holding period is to become listed on a recognised stock exchange. Once the company is listed on a recognised stock exchange it is no longer qualifying; if it becomes listed on a recognised stock exchange, before the three-year minimum holding period, HMRC will claw back investors tax reliefs.
Companies applying for SEIS must have a trade location in the UK, where a considerable part of the business is conducted. A company incorporated in the UK automatically meet this condition. However, non-UK companies must meet this condition in another way. Under SEIS, this means a company must either have a permanent location (branch/management location) or a UK qualifying agent (residing in the UK).
A foreign company must register with the Companies House to set up a branch/agent in the UK. Foreign companies must complete a Companies House OS IN01 form and submit their constitution documents to register their branch or agent.
SEIS qualifying companies cannot raise more than £150,000 under SEIS. EU State Aid rules restrict companies receiving more than £150,000 under SEIS, and State Aid received within the previous three years. 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 qualifying business activity within three years of the SEIS share issue.
When issued, SEIS shares must be paid in full and in the company's bank account. When submitting the company's SEIS1 application, the company will also submit a copy of their bank statement demonstrating 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 capital preservation or pre-arranged exits for investors to get their money back. Furthermore, HMRC will not accept any reciprocal arrangements.
The Risk to Capital condition was introduced by HMRC in 2018, this condition has two parts:
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 difficulty is when the company is unable to meet its debts when they are due or when the liabilities of a company outweigh their assets. HMRC will consider a company to be in financial difficulty if:
Companies should not mislead HMRC regarding their financial situation; otherwise, this may potentially result in investors not being able to get the tax reliefs offered by the Scheme.
The company must be SEIS qualifying for a minimum of three years after the investment is made. If a company fails to meet any of the qualifying conditions, tax relief will be withdrawn, and companies may face litigation from angry investors.
Companies should understand that unless drastic changes occur when HMRC grants its qualifying status, it is unlikely a company will suddenly no longer qualify for SEIS. Companies must tell HMRC if they believe they no longer meet the qualifying conditions within 60 days. HMRC will then judge to determine the next course of action; HMRC will communicate their decision to the company, who should then share this with their investors. Should the decision not be favourable, companies can ask HMRC to review it and/or appeal against it.
SEIS reliefs cannot be used as tax mitigation or 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:
Investors must meet the following conditions to qualify as a SEIS investor:
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 conditions, investors will no longer be qualifying and will lose and/or face clawback of the tax reliefs given. Should at any point an investor become ineligible, they should inform HMRC as soon as possible.
A financial interest in the company is having more than 30% of the shares or voting rights in the company. This requirement applies two years before the subscription and three years after the issue. Any rights to shares and assets carried by an associate during a wind up of trade will also be considered by HMRC. Associates include immediate family members, such as spouses, parents, grandparents, children and grandchildren (siblings are not regarded as connected parties by HMRC).
From low-level employees to company directors, if a company employs an individual, they are connected to the business and not eligible for SEIS tax reliefs. If an investor's associate is employed by the company, the investor will not qualify for tax reliefs; this applies 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 becomes a paid director.
Any company or agent making an application for SEIS advance assurance needs to reassure HMRC that the application is not speculative. The company has potential investors, therefore implying that it will get the investment if it obtains advance assurance. 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 to avoid speculative applications.
Each application for SEIS typically takes a maximum of eight weeks to approve; however, typically, they do come back much quicker than this. However, this can depend on whether HMRC has any questions about the application. 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 advance assurance. Depending on whether a company goes through advance assurance, there are four stages to the process:
Companies applying for SEIS are not required to go through advance assurance. Still, it is recommended to ensure there are no surprises for a company or its investors when investment is received. Not all companies will file for advance assurance, making a company more attractive to prospective investors. Advance assurance is essentially “pre-approval” from HMRC that the company meets the qualifying conditions. Before starting the application, a company should have the following documentation and information:
Once a company has all the above documentation, it can then begin filing for the 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, following this HMRC will grant the company a provisional acceptance of the company’s eligibility for SEIS. Companies can then take this provisional acceptance to prospective investors to encourage them to invest.
Companies that apply for advance assurance will have a quicker and simpler application process when submitting their EIS1. This is due to having already provided the necessary documentation needed by HMRC and will therefore only need to provide documentation for 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 EIS1 compliance statement.
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; otherwise, investors will not receive their tax reliefs.
When HMRC approves the application, the company will receive a SEIS2; this is essentially confirmation from HMRC. 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.
The Company will need to have spent at least 70% of the money or traded at least four months to submit this application. HMRC constitute the trading element as making or trying to make a sale.
Once a company receives confirmation from HMRC in the form of a SEIS2, they can then issue SEIS3s. 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 SEIS3 form will need to be authorised 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 its 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.
Please note that this is only a condensed summary of the taxation legislation and should not be construed as constituting advice that a potential investor should obtain from his or her own investment or taxation adviser. The value of any tax relief 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.
Sapphire works across two UK offices, based in London and Belfast.