SEIS: Guide to the Seed Enterprise Investment Scheme

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.

Contents

• What is the Seed Enterprise Investment Scheme (SEIS)?
• SEIS for companies: use the scheme to attract investors
• SEIS for investors: the scheme offsets some of the risk
• Many UK startups are eligible for SEIS
• Get Advance Assurance to prove you’re eligible for SEIS
• Use Advance Assurance to attract investors
• SEIS compliance: give your investors what they need to claim
• SeedFAST: the SEIS-compatible way to raise before a round
• SEIS vs EIS: SEIS is for smaller companies
• TL;DR? SEIS quick summary
• SEIS jargon buster
• Talk to an expert

What is the Seed Enterprise Investment Scheme (SEIS)?

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)

SEIS for companies: use the scheme to attract investors

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 £250,000 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:

• be used to grow or develop your business
• present a risk of loss of capital for the investor
• not be used to buy all or part of another business
• be spent within 2 years of the investment or the date you started trading, if later

SEIS for investors: the scheme offsets some of the risk

SEIS investors must be UK taxpayers to take advantage of the scheme. An individual investor can invest up to £200,000 under SEIS each tax year (before April 2023, the limit was £100,000). 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:

• Income Tax relief
  Up to 50% Income Tax relief offset against the amount invested
• Capital Gains Tax relief
  50% Capital Gains Tax (CGT) relief on gains from an investment in a non-SEIS company, if the gains are reinvested into an SEIS-eligible company
  No CGT on any gains from the SEIS investment, as long as shares are held for at least 3 years
• Loss relief
  If the business performs badly, the investor can claim loss relief equivalent to their highest rate of Income Tax. Read more about this in our post about SEIS loss relief.
• Inheritance Tax relief
  There’s no Inheritance Tax on SEIS shares as long as they are held for at least 2 years

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  £200,000 as of April 2023).

Some investors don’t qualify for SEIS tax relief

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.

Many UK startups are eligible for SEIS

If you want to attract investors through SEIS, you’ll need to start by checking that your company is eligible for the scheme.

Is your business an excluded trade?

First, make sure your business activities don’t fall under one of HMRC’s excluded trades. These include:

• banking
• insurance
• money lending
• property development
• dealing in land or commodities
• legal or accountancy services
• generating or exporting electricity.

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.

Do your stats fit the SEIS criteria?

Your company must:

• Have been trading for less than 3 years
  Before April 2023, the limit was less than 2 years.
• Employ fewer than 25 people
• Have no more than £350,000 in gross assets
  ‘Gross assets’ means the value of everything the company owns – cash in the bank, property, equipment, stock etc. Before April 2023, this amount was capped at £200,000

Where is your company based?

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.

Do you meet the conditions for ‘risk to capital?

The risk to capital condition requires you to prove that:

• Your company’s objective is to grow over the long term, as a result of the SEIS investment, and
• Investors will put their capital at significant risk by investing in your company

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.

Get Advance Assurance to prove you’re eligible for SEIS

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.

What is Advance Assurance?

AA is confirmation from HMRC that an investment in your company is likely to qualify for SEIS tax relief, assuming that:

• Nothing changes in your company’s circumstances to make it ineligible for SEIS, and
• The information you supplied to HMRC in your AA application is consistent with the information you give investors.

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.

How to apply for SEIS Advance Assurance with SeedLegals

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.

What you need to apply for Advanced Assurance

You’ll need to demonstrate that you fulfil the SEIS criteria. This includes:

• date your company started trading
• details of any SEIS investments you’ve taken previously
• three-year business plan with financial forecast
• your response to the risk to capital condition
  Usually this will be a brief SWOT analysis.
• name, address and intended amount of investment of at least one potential investor if you haven’t previously received Venture Capital Scheme investment. This criterion takes some applicants by surprise. The person you list here doesn’t need to be committed to invest – this requirement is just to deter speculative applications.

You’ll also need these supporting documents:

• latest company bank statements or accounts
• current company Memorandum and Articles of Association
• pitch deck
  This can be the same as the deck you show potential investors.
• financial forecast
  You should submit your forecast for three years from the date of your application and show you need the investment.
• documents confirming previous investments or grants

When you apply through SeedLegals, our experts review all your documents to verify you have everything you need to successfully obtain your Advance Assurance.

SEIS checklist

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.

Use Advance Assurance to attract investors

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).

SEIS compliance: give your investors what they need to claim

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:

• 📄 Send SEIS1 forms to HMRC
  It’s easy to create SEIS1 forms on SeedLegals – here’s how
  Download the forms and email to HMRC.
• 📜 Create SEIS3 certificates
  When HMRC receives your SEIS1 forms, they’ll send you an SEIS2 form which contains your SEIS2 authorisation number. Enter the SEIS2 number on SeedLegals and we build SEIS3 certificates automatically.
• 📨 Share SEIS3 certificates with your investors
  You can do this via SeedLegals. And that’s it! SEIS compliance complete ✅

SEIS vs EIS: SEIS is for smaller companies

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 give 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:

• Raise more
  With EIS, you can raise up to £12 million
  With SEIS, it’s £250,000 (before April 2023, the limit was £150,000)
• Trading for more years
  For EIS, you must have been trading for less than 7 years
  For SEIS, it’s 3 years (before April 2023, 2 years)
• More employees
  For EIS, you must have fewer than 250 employees
  For SEIS, it’s 25 employees
• Gross assets worth more
  For EIS, the company must have no more than £15 million in gross assets
  For SEIS, it’s £350,000 (before April 2023, it was £200,000)

The main differences for EIS investors are:

• Income Tax relief
  EIS investors can claim 30% Income Tax relief against the amount invested.
  For SEIS, it’s 50%
• Capital Gains Tax relief
  Investors can defer up to 100% of the amount they invest under EIS against any Capital Gains Tax they incur up to 1 year before or 3 years after selling their shares.
  For SEIS, investors don’t have to pay CGT when they sell any asset and use all or part of that gain to invest in shares that qualify for SEIS. Also, SEIS investors can get CGT relief worth 50% of their investment.
• Company directors
  An investment isn’t eligible for EIS if they’re a paid director of the company.
  For SEIS, directors of the company can invest and get SEIS tax relief.

SeedFAST: the SEIS-compatible way to raise before a round

If you want to raise extra money before a funding round, while making sure the investment is SEIS compliant, you can do that with our SeedFAST.
SeedFAST is an advance subscription agreement – it’s an SEIS-compliant way to take an investment before a funding round, and an alternative to a convertible note (see below: SEIS jargon buster).

Under a SeedFAST agreement, an investor can get SEIS tax relief as long as their funds are converted into SEIS shares (so their capital becomes ‘at risk’) within a year of you receiving the money.

It’s incredibly quick and simple to create a SeedFAST on SeedLegals – your document can be ready in minutes for your investor to sign. We call this agile fundraising – there’s nothing to stop you getting a top-up of capital when you need it.

TL;DR? SEIS quick summary

• SEIS is a unique opportunity for seed-stage companies: it can be the motivation investors need to fund your company and help make your vision a reality.
• To give investors confidence that their investment in your company will be eligible for SEIS tax relief, apply for SEIS Advance Assurance before you approach them. It’s easy to do on SeedLegals.
• After you’ve secured investment, you can do your funding round and create your SEIS compliance documents on SeedLegals too. By automating the paperwork, you get your time back to focus on growing your business.

SEIS jargon buster

A Ordinary Shares
These are Ordinary Shares with Liquidation Priority: they take advantage of a legal workaround so AO ‘A Ordinary’ shareholders can benefit from SEIS and get their money back first when the company is sold or goes into liquidation.

Advance Assurance
Confirmation from HMRC that a person investing in your company should qualify for SEIS tax relief.

Assets
To be eligible for SEIS, a company must have no more than £350,000 in ‘gross assets’. (Before April 2023, it was £200,000).
These assets include: fixed tangible items such as machinery, cash or another asset that can be converted into cash the same financial year, and intangible things with value such as intellectual property you’ve bought (but not your own patents).

Bootstrap Round
A type of funding round ideal for seed-stage businesses. Usually it’s a first funding round consisting of investments from friends and family. You can do a Bootstrap Round on SeedLegals.

Convertible Note
Or Convertible Loan Note, CLN for short. This agreement is a way to raise money between funding rounds. An investor loans money to your company under the agreement that you’ll either pay them back or give them shares instead of the loan amount at a pre-arranged milestone. Convertible Notes aren’t compatible with SEIS because the investor’s money is not put at sufficient risk. There’s more detail in our post about convertible loan notes.

Liquidation Preference
Investors with liquidation preference get priority when a company is sold or liquidated, so they’re more likely to get their money back compared to other investors without this preference. Read more in our post about SEIS-compatible liquidation preference shares.

Permanent Establishment Test
To qualify for SEIS, a non-UK company must prove that it has a ‘permanent establishment’ in the UK. This means: either a fixed place of business in the UK through which the company’s business is partly/wholly carried out, or a UK-based agent with the authority to act for or enter contracts on behalf of the company.

Trading
In your Advance Assurance application, you must tell HMRC the date your company started trading. To work this out, use HMRC’s analogy of a shop: if you have some products on your shelves and you’ve turned the shop sign to ‘open’, then you’ve started trading: ‘undertaking activities with a view to making a profit’) – even if no customers come in.

Talk to an expert

We’re SEIS specialists – we’ve helped thousands of startups get their Advance Assurance. To get started, book a free call with one of our experts: