The Seed Enterprise Investment Scheme (“SEIS”) is an extremely beneficial initiative, encouraging investment in the earliest stage start-up companies and offering investors significant tax relief.
Qualifying investors are eligible for up to 50% Income Tax relief on their investment, with the current investment limit set at £200k per year. Any profits derived from the sale of SEIS shares are also exempt from Capital Gains Tax, provided the shares have been held for a minimum of three years at the time of sale (and that Income Tax relief has been claimed and not withdrawn).
Furthermore, in the event of an unsuccessful investment, SEIS investors can claim loss relief, which can be used to offset tax on other sources of income.
NAVIGATING SEIS RESTRICTIONS IN EARLY-STAGE FUNDING
While potentially lucrative, SEIS is limited by the individual investor and company limits, which currently stand at £200k and £250k respectively. These limits are the result of an extension brought in from 6 April 2023, increasing the limits from £100k and £150k, however the increased limits are still relatively modest.
For this reason, companies may choose to raise SEIS and EIS (Enterprise Investment Scheme) investment concurrently, to take advantage of both schemes and attract more investors in a single round to raise more funds.
While such an investment round can be great, there are specific criteria which must be met regarding how such a round is structured, otherwise the company’s qualification for SEIS, and therefore the investor’s qualification, may be compromised.
Below, our Equity Rewards & Venture Capital Schemes teams has broken down these essential criteria which must be met for an S/EIS tranche investment to retain its benefits.
Namely, the investment must be a tranche investment, with SEIS investment received at least one day before any EIS investment, for the following reasons:
No Previous Risk Finance Investment
For a company to qualify for SEIS, it must not have previously received any other type of risk finance investment – i.e., EIS and VCT investment – on or before the date the SEIS shares are issued.
Therefore, it is essential SEIS investment comes first, before EIS. Following the issue of SEIS shares, an SEIS1 compliance form must be submitted to HMRC. This needs to happen before an EIS1 compliance form is submitted, following an issue of EIS shares.
The Timing of Investment
A SEIS or EIS investment is considered to have been received if the company has issued the relevant shares and the money has been subscribed by the investors. As such, the timing of the share issue is just as important as the timing of the investment.
It’s important that the date of the EIS share issue, which will be shown in the register of members and on the SH01 on Companies House, is at least one day after the date of any SEIS share issue. SEIS and EIS shares cannot be issued on the same day. As soon as EIS shares are issued, a company will no longer be able to issue SEIS shares.
Gross Assets Limit
The gross asset limit for SEIS is £350k, meaning on the date a company issues its SEIS shares, its gross assets cannot exceed this limit.
When calculating the gross assets, HMRC will exclude any cash arising from the SEIS investment. However, funds raised from EIS and non-qualifying investors will be included and count towards the limit, along with the company’s other fixed and current assets. If the company is part of a larger group of companies, the gross asset limit is applied to the group as a whole.
A common pitfall companies face when they’re doing an investment round comprising of SEIS, EIS and non-risk finance investment is taking all of the investment funds together. This means that a significant amount of cash appears on the balance sheet, bursting the gross asset limit.
It’s important that receipt of the investment funds is structured in order to preserve the gross asset limit for SEIS.
Structure is Crucial
Considering the above, it’s essential that an S/EIS round is structured carefully, to ensure a company remains qualifying for SEIS. The timing of both the receipt of funds and the share issue are critical.
NEED HELP WITH YOUR S/EIS TRANCHE ROUND?
Our Equity Rewards & Venture Capital Schemes team helps clients navigate the EIS and SEIS landscape with confidence every day. As the official EIS Partner for Tech Nation’s Rising Stars programme, the team know the scheme inside out.
So, if you have any questions about how you can tap into its benefits, don’t hesitate to get in touch.
