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SEIS: Tax Incentive for Your Startup’s First Investors

 In Advice

One of the toughest parts of running your own business is to get investors willing to put their money into your organization. It can be not easy to find investors for your business, especially if you are running a startup that implies a higher risk and hence, a higher possibility of loss.

But if startups are never able to get investors, how will they grow? They would be stuck in the vicious cycle of not having enough funds to kickstart projects that could bring in revenue, fail due to lack of projects, and eventually close down. To encourage SMEs and help them bring in investments, the HMRC introduced two schemes: the SEIS and the EIS.

SEIS: What is it?

SEIS stands for Seed Enterprise Investment Scheme is a government program to help SMEs and startups get investments by allowing tax relief to investors. After all, if investors do not see any immediate benefit from investing in a startup, they would not want to do so, which could halted innovation, and no one wants that.

To encourage investors to continue supporting small businesses, the SEIS allows investors to claim tax relief and exemptions on capital gains for about 50% of their investments, capped at an annual investment of £100,000. EIS is similar in its functioning but is more focused on medium-sized enterprises, whereas SEIS targets companies in their early stages that have been functioning for less than two years and have assets worth less than £200,000.

Investors do not have to pay inheritance tax on the shares you may own of a company that is SEIS eligible, and if they choose to sell these shares at a loss, they can offset this against income tax or capital gains tax. Investors can also take back some or all of the money that they have invested in the year after investment.

SIES Eligibility

Before you start relying on this and making investments, of course, investors need to know which companies are eligible for the scheme to make their investment choices accordingly. Most companies do happen to qualify for the SIES, but some of them, depending on their nature, may not be eligible. For example, companies dealing with land and commodities or those involved in banking, insurance, or accounting and legal services are not eligible. Even companies dealing with property development and electricity are excluded from the scheme.

Of course, there is a grey area to these rules, and further analysis needs to be done to make sure whether your company is exempt or not. Companies that involve any of these activities but only make about 20% or less of their trade revenue from these activities may still be eligible for the SIES.

Your company also needs to pass several tests before you can be confident that your investors will be allowed for the SEIS.

How Can You Use SEIS?

To accept an investment under the Seed Enterprise Investment Scheme, you must ensure that the collected funds can only be used for qualified business activity, i.e., it should be used solely to promote the company, help it grow, and aid its development. This could be either developing a new product, kickstarting a project, or even hiring new employees. The investment money, however, must only be used for business activity and nothing else. Companies can raise to £150,000 in SEIS funding,

Investment Rules under SEIS

Any individual can invest a maximum of up to £100,000 per year under SEIS. The shares issued under the SEIS scheme should be common stock and should not have any preferential rights. There is also a strict ruling that any investor who chooses to invest under the SEIS scheme cannot hold more than 30% of the total number of shares, and he should not be connected to the company in any sense. Investors can be given positions on the board after the shares have been issued, but not before. Therefore, you need to ensure that investors have ownership of their shares before they are appointed to any such position on the company board.

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