Seed Enterprise Investment Scheme (SEIS) is great when its structured right…
Problem is the rules are fraught with technicalities and I am increasingly coming across entrepreneurs and startup founders who are ploughing on thinking they qualify for this attractive tax relief on their own investment into their new venture when, in fact – they don’t :(
It is all to easy to jeopardise Seed EIS relief before you’ve even really started – unless you deal with this sort of stuff day-in-day-out.
I thought I would share my thoughts and my experience in this short video above.
SEIS: Startup term I wish I understood but was afraid to ask!
Here is a brief overview of the Seed Enterprise Investment Scheme from a company founder’s perspective.
Armed with more knowledge about this fantastic UK tax incentive aimed at start ups and early stage growth companies, hopefully we can get more impetus behind this government scheme and more backing for promising new companies.
If you need any specific advice, please contact me.
Or try our SEIS DIY Kit.
HM Revenue & Customs kindly provides companies with a form that can be used to apply for advance assurance that a company is a qualifying investment for Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) purposes.
Obtaining such assurance in advance of a share issue under either scheme is highly valuable to prospective investors – in fact, most sophisticated investors will insist upon sight of such an assurance before parting with their cash.
But there is a problem with the form – its dual status means that if you simply fill it out without specifying which of the schemes you are applying under then you are leaving it to HMRC to guess which you are after – which isn’t the best plan in a formal tax clearance!
Admittedly there are a couple of tick boxes that relate specifically to SEIS but you would be well advised to draft a separate letter spelling out your requirements or seeking professional assistance – after all the difference between 50% income tax relief and 30% could free up extra investment for your fledgling company.
As an ambitious entrepreneur and founder of a fast growth business you may benefit from reviewing the following generous tax breaks as part of your 2013 planning:
1. Patent box – introduced with effect from 1 April 2013, companies will be able to elect into this new beneficial company tax rate and pay tax at just 10%. This new rate of corporation tax will be phased in over a four year period.
Innovative UK companies should be taking steps now to ensure that their patents qualify and apply across the widest possible range of products and services to maximise tax savings.
2. R&D tax relief – the SME R&D tax relief continues to get better and better with the enhanced corporation tax deduction now at 225% with no de minimus spend nor PAYE cap on repayments.
Average claims are approx £40,000 yet less than 1% of UK SMEs claim it – are you missing out?
3. Entrepreneur’s relief – when you come to sell the shares in your company you could benefit from this preferred rate of capital gains tax of just 10% on the first £10m of lifetime gains. You must be an officer or employee of the trading company and hold at least 5% of the ordinary shares and voting rights for the 12 months leading up to disposal of the shares to qualify.
You must ensure that the qualifying conditions are not (inadvertently) breached especially if a sale is on the cards in the foreseeable future.
4. EMI share options – the Enterprise Management Incentive share option scheme (EMI) has long been an attractive tool for retaining and incentivising key employees, however, it’s about to get even better….
It has been a long running source of frustration that the option holders struggled to satisfy the requirements of entrepreneur’s relief (ie they rarely tick the 5% share holding requirement nor the 12 month minimum holding period), however, changes are afoot to allow option holders to accrue their 12 month qualifying holding period from the date of grant and for sub 5% holdings to qualify. This promises to be a great development.
5. Seed Enterprise Investment Scheme (SEIS) – raising funding for early stage (< 2 years) trading companies is made a whole lot easier when the investors can receive a 50% income tax break on the funds invested (potentially up to 78% tax relief up until 5 April 2013)!
Companies are limited to £150,000 in total under SEIS whereas individuals have a £100,000 annual investment allowance.
These are just a handful of potentially lucrative tax breaks that should be high on your agenda if you are to release much needed cash into your business and get off to a cracking start in 2013!
In essence it rewards investors by allowing them to reclaim income tax at a rate of 50% of their investment under the scheme (limited to £100,000 investment per tax year) plus a potential capital gains tax free disposal after three years.
But such a generous tax break comes with (many!) terms and conditions….
Common areas where there seems to be much head-scratching is around the limit for the SEIS investment into the company of £150,000 in total; the limit of £200,000 or less gross assets and the 30% connection test. Note these are just a few of the conditions!
Given the above, how can founders make the most of this SEIS tax break whilst getting the funding they need?
These are just a handful of examples based on recent experience of advising fast growth companies and investors – as always there are many ways to skin a cat but it is important to review all options to make the most of the UK SEIS and EIS tax reliefs.
Six months in, we are starting to see increasing activity in relation to the fantastically generous Seed EIS (SEIS) funding tax-break for early stage companies.
Investors can, in effect, be ‘subbed’ £78,000 by the Government for a £100,000 investment into a qualifying SEIS company – which is fairly staggering when you take into account the added benefit that, should the investee company become a roaring success, the investor can sell their shares ‘tax-free’ after three years!
Given these hugely valuable tax breaks, why aren’t we seeing more Seed EIS activity?
I am coming across a few reasons:
I am unsure whether this experience is mirrored across the country but this is certainly something that I am seeing in the north west. Meanwhile, more savvy entrepreneurs are utilising this tax break to help subsidise offshoot ventures.
We need to provide more support for early stage companies (Note: early stage / seed for SEIS means a company that has been trading for less than two years) and – although I am aware there are regulatory issues – I would be interested in exchanging ideas for how we can improve the process of matching Business Angels with potential SEIS qualifying companies across the north west and UK more widely.
If you are looking at starting a new hi-tech venture then the timing has never been better in utilising the latest available UK tax incentives.
Consider a scenario where say 4 enterprising entrepreneurs are looking at building a new state of the art technology platform.
They budget it will cost c£1m to get to market but know they can prove the concept with c£100k-£150k.
But there’s a problem – cashflow is tight….
This is where a bit of forward tax planning can help.
Firstly, they could set up a new company to undertake the venture. They could then structure the shareholdings such that no shareholder and director has more than 30% of the shares and subscribe for shares under the Seed EIS Scheme (SEIS). The company would need to obtain certification that it is SEIS qualifying and it would be well advised to seek advance assurance from HMRC.
A company can raise £150,000 in total under SEIS so each of the four shareholders could subscribe £37,500 for 25% of the ordinary shares.
Under SEIS, each shareholder would be able to reclaim 50% income tax relief on their investment – so £18,750 income tax relief could be claimed by each shareholder amounting to a total £75,000 tax saving.
But there’s more….
The company could use the funds to engage in a qualifying SEIS trade of preparation for a trade by carrying out R&D activities. The R&D work could fall within the R&D tax credit regime which allows for a 125% uplift in qualifying spend for SMEs and capacity to claim a tax refund in situations where the company is loss-making – this will almost certainly be the case based on our facts as the company is pre-revenue.
So say the company invests the £150,000 into qualifying R&D in its first year then the company would be eligible to deduct a further £187,500 for tax purposes i.e. 125% * £150,000.
The company would suffer a tax loss of £337,500 and could either carry this loss forward to offset against future taxable profits or it could elect to surrender the tax loss in return for a tax refund. The refund is restricted to 11% of the enhanced R&D tax spend which equates to £37,125 cash back from HMRC.
Once the SEIS cash has been exhausted they can seek further funding under the less favourable (but still hugely attractive) Enterprise Investment Scheme (EIS). Further R&D tax credits should be available in later years too whilst the R&D activities continue.
So our new venture has succeeded in deploying £150,000 of funding and expenditure at a net cost to the founders of just £37,875. SEIS and R&D tax incentives have effectively provided the additional £112,125 cash funding!
This scenario does not take into account the possibility of some or all of the SEIS shareholders taking advantage of the one-off capital gains exemption on gains reinvested in the tax year to 5 April 2013 – we’ll leave this for another post as the tax savings are staggering!
Hopefully this illustrates that with just a bit of forward planning and by seeking some professional advice, it is amazing how you can conjure up much needed additional cash to fund worthwhile ventures.
Interesting timing given that HMRC will not actually provide advance assurance to applicants until the new SEIS tax laws receive formal approval (‘Royal Assent’) – likely in July this year…..
The introduction of Seed EIS (SEIS) is a major break-through for early stage companies seeking funding.
Here are 10 need to know (N2K!) facts for start-up founders on the new SEIS scheme:
This is a great opportunity for start-up founders to access much needed capital at a time when traditional sources of bank and grant funding are thin on the ground.
Please drop me a line if you would like some assistance in navigating the SEIS or EIS rules either as a company founder or business angel investor.