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 may see you as a high-risk investment – but with the tax relief benefits offered through SEIS they could be ready to take the plunge.
In this article we explain how your company can qualify for SEIS, enabling you to attract investors with the incentive of SEIS tax relief. Our guide includes:
What is SEIS? An introduction
In 2012, the UK government set up the Seed Enterprise Investment Scheme (SEIS) as an initiative that would incentivise investment in small, seed-stage companies. By offering tax relief benefits to private investors who invest in these businesses, it was hoped that this would stimulate the growth of the economy and encourage entrepreneurship.
The SEIS scheme has been very successful in its original aims. Some of the most recent statistics from HMRC showed that £189 million was raised under SEIS for 2,320 companies in the 2017–2018 tax year.
SEIS: Advantages and Rules for Companies
As a company, the main advantage of SEIS is the ability 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 is not connected to the SEIS investor. The loan must also have been taken out “for the purposes of trade” (i.e. not to cover that extravagant company Christmas lunch!).
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/part of another business
- Be spent within 2 years of the investment or the date you started trading (if later)
SEIS: Advantages and Rules for Investors
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. He or she can’t be a company employee, but they can be a paid director.
It’s important to note that if you’re hoping to raise a Bootstrap Round on SeedLegals with investment from family and friends, certain family members can’t claim SEIS benefits as they count as “associates” of the company. These include spouses, civil partners, parents, and children – but not siblings.
To qualify for SEIS tax relief, the investor must not hold more than 30% of the company’s overall shares. He or she is also technically disqualified from liquidation preference, but there is a workaround by using “A Ordinary Shares” – as explained in this blog post. If they’re specifically requested, you should be prepared to grant these SEIS-compliant A Ordinary Shares. SeedLegals makes this super easy to do.
SEIS investors qualify for the following tax relief benefits:
- Up to 50% income tax relief offset against the amount invested
- Capital Gains Tax relief of 50% on investment in a non-SEIS company, if the gains from that investment are reinvested into an SEIS-eligible company
- No CGT payable for any gains from the SEIS investment, as long as shares are held for at least 3 years
- If the business performs badly, the investor can claim loss relief equivalent to his or her highest rate of income tax
- No inheritance tax is payable 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, providing that the investor had not already invested the maximum of £100,000 under SEIS in that year.
Is my Company 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.
First, you should make sure that your business activities don’t fall under one of HMRC’s excluded trades. These include: banking, insurance, or money-lending; property development; dealing in land or commodities; legal or accountancy services; and generating or exporting electricity. You can check HMRC’s full list of excluded trades here.
However, if you’re worried that some of your business activities might be excluded, the good news is that they must be a “substantial” proportion (+20%) of your overall activities to prevent you from qualifying from SEIS. Your eligibility may also not be affected if you are simply supporting an excluded trade (for instance, you have an app that monitors electricity usage).
Key Figures for SEIS Eligibility
The next step in checking your company’s SEIS eligibility is to compare it against some figures. You must:
- Have been trading for less than 2 years
- Employ fewer than 25 people
- Possess no more than £200,000 in gross assets
If your company is not UK-owned you may still qualify for SEIS. HMRC will expect 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, through which business is regularly conducted.
Risk to Capital Condition
Only added to the SEIS criteria in 2018, 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 be putting their capital at significant risk by investing in your company.
This condition means you have to perform a bit of a balancing act: between convincing HMRC that you pose a risk to investors and convincing investors that funding you is a sound financial proposition!
If you’re looking for a way to raise money between funding rounds, while still complying with the Risk to Capital Condition, you can consider using a SeedFAST agreement (see “SeedFAST” section below).
Advance Assurance for SEIS
So, you’ve established that you should qualify for SEIS funding and you want to tell investors all about the exciting investment opportunities you can offer.
Stop for one moment. If you are 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, providing that:
- Nothing changes in the company’s circumstances to make it ineligible for SEIS, and
- The information you supplied to HMRC, in support of your AA application, is consistent with the information supplied to investors.
The majority of potential investors (maybe except friends & family) will want to see confirmation of your AA before they will consider making an investment. Therefore, it’s important to leave plenty of time (1–2 months) for your application to be processed before you start offering SEIS investment opportunities.
Applying for AA is simple with SeedLegals. We process more than 10% of AA applications in the UK, with a 98% success rate (compared to 62% on average). Read on to find out how to complete your application.
How to Apply for Advance Assurance with SeedLegals
You can complete your AA application online via the SeedLegals website. It’s free to sign up and begin the application process, and, in addition, our support team will provide advice on any aspect of the application whenever you need it.
Before you get started, make sure you have your company’s UTR number to hand, as this will be necessary to identify your organisation on the application form. If you can’t find it or you don’t think you received one when you registered your company, you can request it from HMRC.
Let’s take a look at the main components of the AA application:
In the application form you’ll need to provide all the information necessary to demonstrate that you fulfil HMRC’s SEIS criteria. This includes:
- The date your company started trading
- Details of any other venture capital schemes you’ve benefited from
- A 3-year business plan with financial forecast
- A response to the Risk to Capital Condition (usually a brief SWOT analysis)
- The name, address, and intended amount of investment of at least one potential investor (the individual is not committed to invest, however; HMRC is just trying to deter speculative applications).
A cover letter isn’t required by HMRC, but we strongly recommend including one with your application. It sums up all the key details of your company and how you intend to use the SEIS funds to grow. Once you’ve filled in the AA application form on the SeedLegals website we’ll use the information you supplied to generate a cover letter, so you don’t have to worry about writing it yourself.
You’ll now need to gather the supporting documents to attach to your application. These include:
- Your latest bank statements or accounts
- A current copy of the company’s memorandum and articles of association
- A pitch deck (essentially the same as you show to potential investors)
- A financial forecast
- Documents confirming previous investments or grants
Before you submit the application, our expert team will review all your supporting documents to ensure you have everything you need.
HMRC recently introduced an AA Checklist which must be filled in and submitted along with the application form. This is designed to make sure you’ve included all the right information so the application process isn’t delayed. However, when you’ve completed the application form and supplied all the supporting documents we’ll automatically fill in the checklist for you.
Submitting your Application
The final stage of the AA application process is to send off your application to HMRC. Ideally this will be via email, making sure you attach all your supporting documents. HMRC takes 6–8 weeks to process applications on average, but we’re seeing a quicker turnaround of 2–3 weeks with SeedLegals applications.
How to Find SEIS Investors
Once your AA application has been approved you’ll be able to approach potential investors with confidence, armed with the knowledge 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 can also go along to networking events for angel investors, where you’ll hopefully find someone who will share your company’s vision.
And don’t forget that friends and family (with certain restrictions: see “SEIS: Advantages and rules for investors” above) might want to invest in you too.
Completing your SEIS Compliance
When you’ve found investors, finished your funding round, and issued your SEIS shares, you’ll then need to complete your SEIS compliance for HMRC. As with your Advance Assurance application, it’s very straightforward to go through the SEIS compliance process with SeedLegals.
Here’s what you need to do:
- Create your SEIS1 forms on the SeedLegals platform, download them, and email them to HMRC
- Wait until you receive an SEIS2 form from HMRC, containing your SEIS2 authorisation number
- Enter the SEIS2 number on SeedLegals and your SEIS3 certificates will be built automatically
- Share the SEIS3 certificates with your investors.
In just a few simple steps your investors will have what they need to claim their SEIS tax relief.
SeedFAST – the SEIS-compatible Alternative to a Convertible Note
If you find yourself in a position where you need to raise extra funds before a full funding round, while remaining SEIS compliant, our SeedFAST advance subscription agreement can help you do just that.
The SeedFAST is an SEIS-compliant alternative to a Convertible Note (see “Glossary”). Under the SF agreement, an investor can receive SEIS tax relief as long as their funds are converted into SEIS shares (and thus their capital becomes “at risk”) within a year of your receiving them.
SeedLegals makes it quick and simple to create an SF agreement ready for your investor to sign, so there’s nothing to stop you getting a top-up of essentials funds when you need them.
SEIS vs. EIS: The Two Schemes Compared
As SEIS is aimed at seed-stage businesses, if you’re successful in growing your company you may want to move on to fundraise through EIS – the Enterprise Investment Scheme.
EIS is the “big brother” of SEIS. It was launched in 1992 and provides a tax relief incentive for investors to invest in small-to-medium-size startups. SEIS and EIS have similar rules and benefits for companies and investors, but EIS is tailored towards slightly larger companies and reflects the reduced risk for investors.
The key criteria for EIS-eligible companies (with SEIS figures in brackets) are:
- A company can raise up to £12 million under the scheme (£150,000)
- They must have been trading for less than 7 years (2 years)
- They must have fewer than 250 employees (25 employees)
- They can have no more than £15 million in gross assets (£200,000).
The main differences for EIS investors are:
- Investors can claim 30% income tax relief against the amount invested (50%)
- They can defer up to 100% of the amount they invest under the scheme against any CGT incurred up to 1 year before or 3 years following the disposal of the shares.
- An EIS investor can’t be a paid director of the company in which they wish to invest.
You can fundraise under both schemes in one funding round, but the SEIS shares must be issued before the EIS funds are transferred to you.
SEIS is a great opportunity for seed-stage companies: it provides the motivation investors need to fund you and help make your vision a reality.
Gaining Advance Assurance from HMRC will give investors confidence that they will be eligible for SEIS tax relief, so make sure you apply in good time before approaching them. It’s simple to apply via SeedLegals and we provide all the support you need to fill in the application form and gather your supporting documents.
Then, once you’ve secured investment, we’ll even take care of the funding round and SEIS compliance for you – so you can focus on building up your business and creating a great product.
Glossary of Terms in this SEIS Guide
A Ordinary Shares: Ordinary Shares with Liquidation Priority: these take advantage of a legal workaround so AO shareholders can benefit from SEIS and get their money back first upon liquidation.
Advance Assurance: Confirmation from HMRC that an individual investing in your company should qualify for SEIS tax relief.
Assets: To be eligible for SEIS a company must have no more than £200,000 in gross assets. These assets include: fixed tangible assets (e.g. machinery), current assets (cash or another asset that can be converted into cash the same financial year), and intangible assets (intellectual property acquired by the company – e.g. not your own patents).
Bootstrap Round: A type of funding round on SeedLegals, ideal for seed-stage businesses conducting a first funding round with investments from friends and family.
Convertible Note: A way of raising funds between rounds: an investor loans money to a company under the agreement that it will become equity at a pre-arranged milestone. Not compatible with SEIS as the investor’s money is not placed at sufficient risk.
Liquidation Preference: Where certain investors are given priority when a company is sold/liquidated, so they get their money back before others. Incompatible with SEIS as investors must be on an even footing.
Permanent Establishment Test: To qualify for SEIS, a non-UK company must prove that it has a “permanent establishment” in the UK. A “permanent establishment” 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/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, you can use HMRC’s analogy of a shop: if you have some products on your shelves and you’ve turned the shop sign to “Open”, you’ve started trading (“undertaking activities with a view to a profit”) even if no customers come in.