How Irish business can use the SEIS and EIS to attract investors
Even with the ever growing number of investment options in Ireland, founders can look further afield for funding. One op...
You’ve just launched your company: you’re busy working on your product, trying to gain traction, seeking feedback from early-stage users so you can refine the customer experience and your value proposition. You now need investors who will buy into your vision.
That’s where the Seed Enterprise Investment Scheme (SEIS) comes into play. As a seed-stage business, angel investors might see you as a high-risk investment – but with the tax relief benefits offered through SEIS they could be ready to take the plunge.
If you’re looking to raise under SEIS you can easily apply for SEIS Advance Assurance on SeedLegals. And if you have questions after reading this post, you can book a free chat with one of our experts.
In 2012, the UK government set up the Seed Enterprise Investment Scheme (SEIS) as an initiative to incentivise investment in small, seed-stage companies. By offering tax relief benefits to private investors who invest in these businesses, the aim was to stimulate the growth of the economy and encourage entrepreneurship.
The SEIS scheme has been very successful in its original aims. The most recent statistics from HMRC show that £175 million was raised under SEIS for 2,065 companies in the 2020 – 2021 tax year – that’s up 4% from 2019 to 2020.
Want to know who’s using SEIS to raise? The most common sector is Information and Communication (41%), followed by Professional, Scientific and Technical. And 68% of companies raising with SEIS are registered in London and the South East. (source: HMRC)
The main advantage of SEIS is the ability for your company to raise funds that would otherwise be hard to secure as a seed-stage business. If you’re eligible for SEIS (we discuss the eligibility criteria below) you can raise up to £150,000 in total under the scheme.
A further advantage of SEIS funding is that you aren’t prevented from using the money to repay any third party loans, as long as the loan isn’t connected to the SEIS investor. The loan must also have been taken out ‘for the purposes of trade’.
According to HMRC’s rules, the funds raised through SEIS shares must:
SEIS investors must be UK taxpayers to take advantage of the scheme. An individual investor can invest up to £100,000 under SEIS each tax year. They can’t be an employee of the company they’re investing in, but they can be a paid director.
SEIS investors qualify for these types of tax relief:
Tax relief can be carried back to the previous tax year, as long as the investor hasn’t already invested the maximum they’re allowed under SEIS in that year (£100,00 until 6 April 2023, £200,000 after that).
If you’re hoping to raise a round with investment from family and friends, it’s important to know that certain family members can’t claim SEIS tax relief if they’re closely involved with the company because they count as your ‘associates’.
‘Associates’ include spouses, civil partners, parents, and children – but not siblings. Associates don’t qualify for SEIS tax relief if they’re an employee of the company or they own more than 30% of the shares. There are full details on who’s excluded the gov.uk website.
Any SEIS investor must not hold more than 30% of the company’s overall shares. They’re also technically disqualified from liquidation preference, but there’s a workaround by using ‘A Ordinary Shares’ – as we’ve explained in our post about liquidation preference. If an investor specifically requests this, you can grant these SEIS-compliant A Ordinary Shares. SeedLegals makes this super easy to do – to ask us about this, hit the chat button.
If you want to attract investors through SEIS, you’ll need to start by checking that your company is eligible for the scheme.
First, make sure your business activities don’t fall under one of HMRC’s excluded trades. These include:
For the full list of excluded trades, check HMRC’s list.
If you’re worried that some of your business activities might be excluded, the good news is that the excluded activities must be a ‘substantial’ proportion (more than 20%) of your overall activities to prevent you from qualifying from SEIS.
You might still be eligible if you’re supporting an excluded trade, for example, your app monitors electricity usage.
Your company must:
If your company is not UK-owned you might still qualify for SEIS. HMRC expects you to prove that you have a ‘permanent establishment’ in the UK. That is, you’ll need to demonstrate that your company has a fixed place of business in the UK or a UK-based agent who carries out work for you.
The risk to capital condition requires you to prove that:
This condition means you’ll have to perform a balancing act: you’ll need to convince HMRC that you pose a risk to investors at the same time as convincing investors that funding your company is a sound proposition.
So you’ve established that your company qualifies for SEIS funding and you want to tell investors about the exciting investment opportunity you can offer…
Hold your horses! If you’re going to convince investors to fund your enterprise, they will want to see some form of proof that their investments will be eligible for SEIS tax relief. That’s where Advance Assurance (AA) comes in.
AA is confirmation from HMRC that an investment in your company is likely to qualify for SEIS tax relief, assuming that:
The majority of potential investors (except perhaps your friends and family) will want to see confirmation of your AA before they’ll consider making an investment. That’s why it’s important to leave plenty of time – at least 1 to 2 months for HMRC to process your application – before you start offering SEIS investment opportunities.
With SeedLegals, applying for AA is simple. We do more than 60% of AA applications in the UK, with a 98% success rate (compared to the average of 62%). Read on to find out how to complete your application.
You can apply for Advanced Assurance with SeedLegals. Our combined expert support and automated workflow help to streamline the process. Our SEIS experts are with you every step of the way and can guide you through the process from start to finish – unlimited support is included at no extra cost. At the end of the process once your documents are finalised, we will also apply on your behalf on HMRC’s website. It’s free to sign up and get started.
Before you start, make sure you have your company’s UTR number on hand because you’ll need this for the application form. If you can’t find the UTR or you don’t think you received one when you registered your company, you can request a UTR from HMRC.
You’ll need to demonstrate that you fulfil the SEIS criteria. This includes:
You’ll also need these supporting documents:
When you apply through SeedLegals, our experts review all your documents to verify you have everything you need to successfully obtain your Advance Assurance.
In 2019, HMRC introduced an SEIS Advance Assurance Checklist which must be filled in and submitted along with the application form. The checklist is designed to make sure you’ve included all the right information so HMRC isn’t delayed in processing your application.
On SeedLegals, when you complete the application form and supply the supporting documents, we automatically fill in the checklist for you.
When your AA application has been approved, you’ll be able to approach more potential investors with confidence, knowing that their investment should qualify for SEIS tax relief.
One source of investment would be an SEIS investment fund which specialises in investing in seed-stage companies and small startups. You could also attend networking events for founders and angel investors, where you’ll hopefully find an investor enthusiastic about your company’s vision.
And don’t forget that friends and family can use SEIS to invest in you too – the usual investor restrictions apply (see above: SEIS for investors).
When you’ve found investors, finished your funding round, and issued your SEIS shares, you’ll then need to do SEIS compliance. As with applying for Advance Assurance, at SeedLegals we make this straightforward.
In a few simple steps, your investors get what they need to claim their SEIS tax relief. Here’s what to do:
Because SEIS is aimed at seed-stage businesses, if you’re successful in growing your company you might move on to fundraise through EIS, the Enterprise Investment Scheme.
What’s the difference between EIS and SEIS? Basically, EIS is the older sibling of SEIS. Both schemes gives tax relief to investors who invest in small-to-medium startups. SEIS and EIS have similar rules and benefits for companies and investors, but EIS is for slightly larger companies and reflects the reduced risk for investors.
Here’s how the criteria for EIS compare to SEIS:
The main differences for EIS investors are: