Mini-Budget 2022: Key takeaways that could affect your business
Find out how changes to tax and business support announced in the government's Growth Plan 2022 could help your company...
SEIS and EIS investment fuels the UK startup ecosystem. At SeedLegals we estimate that 80% of all early-stage investment (angel and seed funding rounds, companies raising up to £500K) is SEIS or EIS investment, from angel investors and SEIS/EIS funds, with investors looking for those tax deductions on their investment, and no capital gains tax on sale of their shares later.
In this post, we explain the changes coming to SEIS from April 2023, how to take advantage of the new rules to start raising up to £250,000 right now, and the limitations and things to watch out for.
Although companies can raise up to £12M in EIS when they’ve exhausted their £150K SEIS allowance, the increased benefits of SEIS to investors – a 50% deduction of their investment amount against their income tax vs. 30% for EIS – meant that many investors and SEIS VC funds would only invest SEIS. And that created, to some extent, an £150K glass ceiling on first investment round sizes.
When the SEIS system was introduced back in 2012, raising £150K in a first round was just about perfect for most startups. But that was a decade ago. £150K ain’t what it used to be, companies really need to raise more than that now for their first round if they’re to have enough capital to build a team and get a product to market before needing to raise again.
The other problem that the £150K SEIS limit created was first round company valuations in the UK that weren’t increasing in line with valuations in, particularly, the US. SeedLegals data shows that companies dilute on average 10% to 15% in a first funding round, which gave rise to a pattern of companies raising £150K on pre-money valuations in the range of £850K to £1M or so… which again was fine back in 2012, but things have moved on since then.
In the September 2022 mini-budget, the UK government announced major improvements to the SEIS programme:
For investors, they were previously limited to being able to invest a maximum of £100,000 per year in SEIS, and up to £1M in EIS. That’s now increased to a personal investor limit of £200,000 per year, which should unlock more investor money (at least from those with more than £100,000 in discretionary funds available for investing).
That’s exciting news!
But there’s just one problem: these changes all begin at the start of the 2023 tax year- 6 April 2023.
That’s six months away… if only you could take advantage of this today…
The new rules kick in on 6 April 2023.
The SEIS rules are applied on the date that the shares are issued.
So… what if you could raise investment now and only issue the shares after 6 April 2023… Is it possible to do that…?
Yes, the good news is that you can! By raising investment with SeedFASTs with a six-month longstop date, so that investors invest now, but the shares are issued in April 2023, when the new SEIS rules apply.
So, here’s a quick list of things you can do to take advantage of the new rules right now, and the limitations and things to watch out for:
To be SEIS/EIS compatible, a SeedFAST needs to have a long-stop date no more than six months in the future. That is, it must convert into shares in no more than six months from the date of the agreement. Which just coincidentally happens to be six months from now. Well, almost – more specifically it’s six months from 6 Oct 2022, so make sure you wait until then to issue the SeedFAST.
If you’ve already raised the current maximum of £150,000 in SEIS, you can raise up to £100,000 more as long as:
It’s a bit of an edge case, but if your company has been trading for up to 2.5 years at 6 October 2022, then you still have the opportunity to raise investment with SEIS now. Here’s how:
Under the existing SEIS rules, a company can only offer SEIS if it’s been trading – that is, offering goods or services for sale – for no more than 2 years. The company can have been incorporated well before then, that’s fine, as long as it hasn’t been offering goods for sale for more than 2 years.
If you’ve just passed that 2 year limit, but have been trading for less than 2.5 years then it’s good news: if you raise with SeedFASTs which convert on 6 April 2023, you’ll have been trading for just under the new 3 year limit.
The SEIS rules are clear: ‘No SEIS after EIS’ – which means if your company has ever issued EIS shares, you can never raise SEIS after that. So, unfortunately the new rules won’t help you here.
One of the many advantages of raising with SeedFASTs is you can freely mix and match SEIS and EIS investments. For example, you could:
… all with SeedFASTs.
It’s fine that Charles’ SEIS SeedFAST investment comes after Bob’s EIS investment because the ‘no SEIS after EIS’ rule applies to when the shares are issued, not when the funds were received, So when the SeedFASTs convert you’ll need to make sure that the EIS investments all convert into shares at least one day after all the SEIS investments convert into shares. If you do your SeedFAST conversions on SeedLegals, the platform automatically sorts all that for you.
Use SeedFAST to take a one-off investment before a funding round. SEIS compatible, no company valuation required, your SeedFAST can be ready to sign in minutes.Find out more
If you plan to raise a mix of SEIS and EIS (or non-SEIS) money either in a funding round or by way of SeedFASTs, you need to be careful to avoid going over the £200,000 gross asset limit – which will change to £350,000 from April 2023.
Gross assets for SEIS purposes are defined as the total assets of the company excluding the SEIS investments themselves. There’s more detail on this in our article: Check you meet the SEIS/EIS gross assets requirement
This means that you can use SeedFASTs now to raise:
and still be within the new £350,000 gross assets limit when the SeedFASTs convert.
Here’s why it works:
The above points assume that your company doesn’t have any other qualifying assets or cash in the bank – if you do, then of course you’ll need to factor in those other assets when you calculate your company’s gross assets.
Remember: it’s the money in the bank at the time the shares are issued that counts. So if you raised £500,000 in EIS investment and spent £200,000 of that EIS money before those SeedFASTs convert, then your company’s gross assets (according to HMRC) won’t include that £200,000. That’s assuming you spent the money on things like paying salaries, rather than buying equipment or stock.
Update 15/03/23: The government has confirmed these changes to the Seed Enterprise Investment Scheme will be included in the Spring Finance Bill 2023 (to be published on 23 March). This Bill will then go for Parliamentary approval. Read more in the policy paper at the gov.uk website.
The information in this post is based on the limited details given in the mini-budget statement and Growth Plan documents.
The Autumn Statement document published on 17 November 2022 confirmed that the changes to SEIS and EIS set out in the mini-budget will go ahead (3.31, page 35). The document also states that the government aims to extend the Enterprise Investment Schemes in the future.
Until Parliament approves the changes and HMRC update their website and confirm the exact details (for example, that the new rules will start on 6 April 2023, that the new rules will apply to shares issued on or after that date even if the funds were received before then, etc) take all the above as conjecture, not legal advice.
You can talk to investors and plan based on the above, but you’ll need to see the details confirmed on the HMRC website before signing any investment agreements. We’ll update this post when we see that HMRC has published the details on their website.
Main image by redgreystock on Freepik
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