Enterprise Investment Scheme

SEIS | Need to know facts for startups

SEIS Need to know tips for startups from Business N2K on Vimeo.

A short 5 min overview of the Seed EIS tax incentive and need to know facts and tips for startup founders.

Remember, SEIS requires a subscription for shares – loans do not work.

Look forward to your feedback and experience of using the scheme in the comments section below.

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Think you’ve got SEIS tax relief – are you sure?

You think you’ve got SEIS tax relief – are you sure? from Business N2K on Vimeo.

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.

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What is SEIS?

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.

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£1m benefit of being a tax aware entrepreneur

EuphoriaMark knew that his new business would be at the cutting-edge of technology and potentially even a world-player – exactly the sort of business that the UK Government is keen to promote and support in the form of tax incentives.

Fully aware of the opportunities that the UK tax code provided for releasing cash into his new venture, Mark kicked off by raising an initial £150,000 under the Seed Enterprise Investment Scheme (SEIS). A 50% income tax break for the investors made it easier to nudge up the cash they were willing to part with; plus the opportunity to sell their shares after three years – capital gains tax ‘free’ – made the investment even sweeter. Mark had pondered utilising this tax break on his own £10,000 investment into the company but decided that, on this occasion he wanted to retain more than 30% of the share capital (which precluded him from SEIS) – maybe next time…

This SEIS cash would be used to fund the R&D phase in employing a small team of developers. Given that the company was pre-revenue, Mark was able to claim a welcome tax refund from HM Revenue & Customs under the SME R&D tax credit scheme. This released in excess of £30,000 into the business which was promptly used to fund a further developer outside the SEIS funds to accelerate the project.

Having made significant inroads on the R&D work (whilst burning through in excess of 70% of the SEIS cash!), Mark approached investors for a further round of funding – this time under the Enterprise Investment Scheme (SEIS’s ‘big brother’!). A 30% income tax break this time for investors (plus potential for a capital gains free exit) provided sufficient enticement for investors to inject a further £2m into the company.

Meanwhile, whilst the R&D work was ongoing, Mark had made investigations regarding the potential for filing one or more patents on aspects of the underlying invention generated by the R&D work. With the arrival of the new Patent Box tax incentive from 1 April 2013, Mark knew that a 10% corporation tax rate by 2017 on worldwide income derived from qualifying patents could add additional value to his company as it approached an exit as well as releasing further much needed cash into the business from now until then.

Eyeing an exit in 3-5 years time, Mark ensured he retained at least 5% of the share capital post dilution at each funding round in order to secure a capital gains tax rate of just 10% on his first £10m of gains. His SEIS and EIS investors should be extra happy with a 0% capital gains tax rate after three years!

All in all, Mark had pulled the relevant statutory tax incentive levers to maximise the release of cash into his business at each stage of its life-cycle. What was this worth? It depends – the SEIS, R&D and EIS savings total approximately £700,000 but assuming a profitable few years under the the Patent Box and taking into account the above savings it is not difficult to reach overall pre-exit cash tax savings of £1m+.

Getting advice from the start can get you on the road to being a tax aware entrepreneur…

image credit:Creative Commons License Hartwig HKD via Compfight

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EIS or SEIS – You decide!

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.

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EIS / SEIS: Navigating traps for the unwary (webinar)

  • Are you an entrepreneur or company founder seeking funding? 
  • Have you considered the benefits of the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) to attract private investment from individuals and business angels? 
  • Or are you a prospective EIS / SEIS investor?

If you answered YES to any of the above, this FREE webinar may be for you. 

In this 45min webinar, Steve Livingston, Chartered Accountant and experienced tax advisor to fast growth companies walks participants through:

  1. An overview of the EIS / SEIS schemes
  2. Does my company qualify – common areas for concern?
  3. How to get advance assurance from HMRC and why its important?
  4. Common investor stumbling blocks
  5. Practical issues in structuring the investment to ensure it qualifies
  6. I’ve received the funding – now what?
  7. DIY – How wrong could this get,,,,,?

This seminar aims to provide entrepreneurs and company founders with an overview of the common stumbling blocks encountered in raising EIS / SEIS fundings so that they can maximise funding opportunities and help ensure that their investors’ tax position remains protected.

You will ideally already have an understanding of the basics of EIS / SEIS, although not essential.

To find out more about ip tax solutions visit our site: www.iptaxsolutions.co.uk

If you enjoyed this post, get email updates (it’s free).


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When tax planning can be good!

Life is a precious gift. Don't waste it being unhappy, dissatisfied, or anything else you can be

Tax planning is getting a real battering at the moment – in some cases, for all the right reasons – but there are many instances where effective tax planning is essential for fast growth businesses and, in fact, positively encouraged by the government.

Aside from printing money to erode away much of our UK budget deficit (…), the Government appreciates that by encouraging entrepreneurs to build hi-tech companies here in the UK then we might have a fighting chance of seeing a brighter economic picture in the short-medium term.

To help us achieve this, the Government introduced 5 key statutory tax incentives that they absolutely and positively want entrepreneurs to claim:

  1. Enterprise Investment Scheme (EIS) / Seed Enterprise Investment Scheme (SEIS)
  2. Enterprise Management Incentive Scheme (EMI)
  3. R&D tax credits
  4. Patent Box
  5. Entrepreneur’s Relief 

As a chartered accountant specialising in advising fast growth companies in these areas – you can find plenty more about these tax incentives on this site or by getting in touch – in my view:

If all UK entrepreneurial businesses took advantage of these five statutory tax incentives (where applicable) and used the funds saved to reinvest in new jobs, new marketing channels and new business ventures; then surely we could reinvigorate our economy with fresh, innovative ip rich companies that can compete on a global scale

Enough of the ‘tax bashing’ – let’s make sure that our entrepreneurs have all of the tools necessary at their disposal if they are to get us back on top – an effective and supportive tax regime for entrepreneurs is one of them (and the good news in the UK is that – for now – we have one…).

Image attribution: @Doug88888 via Compfight

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Getting the most out of SEIS to fill the funding gap

Meet Drink Think, Start-Up Cafe, Coventry Univ...The Seed Enterprise Investment Scheme (SEIS) provides an excellent opportunity for early stage fast growth companies to access funding from founders, family, friends and business angels.

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?

  1. Try to spread the £150,000 total investment between investors / founders to avoid breaching the 30% connection test e.g four individuals with 25% each can work well
  2. Remember the test for the £200,000 gross assets is applied immediately before the issue of the SEIS shares – so you could seek external (non-SEIS) investment top-up funding afterwards. Note that EIS funding is only available once 70% of the SEIS funding has been spent.
  3. Investor(s) could invest an amount as a subscription for SEIS shares up to 30% of the share capital and then loan the remainder.
  4. Investor(s) could invest further amounts in a company by subscribing for less shares but with the remainder being credited to share premium e.g. if an investor / director already holds 29% of the ordinary share capital they could invest a further sum (subject to the SEIS limits) for a further 1% of the ordinary share capital with the remainder posted to share premium.

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.

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Mix SEIS + R&D Tax Credits to Maximise your Start-up Funding

Taxes

Taxes (Photo credit: Tax Credits)

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.

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Seed EIS (SEIS) – 10 need to know facts for UK start-ups

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:

  1. SEIS allows investors in early stage companies to receive 50% income tax relief on investments up to £100,000 per year. So for every £1 invested, HM Revenue & Customs will refund 50p regardless of their rate of income tax!
  2. SEIS investors will pay no capital gains tax on ultimate disposal of their shares so long as the company remains as a qualifying SEIS company for 3 years. So even if your business turns into tomorrow’s Facebook, the investors will not pay a penny in capital gains tax on ultimate exit!
  3. There is an added bonus for investors between 6 April 2012 – 5 April 2013 in that they can reinvest any gains crystallised in the year and wipe out the gain completely – so say an individual sold a rental property in the year and realised a profit / gain of £100,000 they would normally be liable to pay up to £28,000 capital gains tax. However, they could reinvest this into a SEIS investment instead and receive 50% income tax relief plus eliminate the taxable gain entirely – this equates to a whopping 78% tax relief or, put another way, a 22p in the £1 investment cost…..!
  4. Your company must have commenced trading within the past two years to qualify for Seed EIS – remember this is aimed at early stage companies only – and must be unquoted (AIM and PLUS listings count as unquoted for these purposes)
  5. Companies are limited to raising a maximum of £150,000 under SEIS – after this, they may be eligible for SEIS’s Big Brother, EIS, provided 70% of the SEIS cash has been spent (…!)
  6. To qualify for SEIS, companies must have less than 25 employees and gross assets of £200,000 or less (before the investment round).
  7. Early indications were that SEIS would apply to loans to startups as well as subscription for shares but the rules as implemented restrict the relief to subscription for ordinary shares only.
  8. There are material interest limits (30%), certain trades are excluded and there are a fair few stumbling blocks for the unwary as the rules largely mirror EIS.
  9. You can obtain advance assurance on whether the company is a qualifying SEIS company from HMRC.
  10. It applies from 6 April 2012. The legislation states that it will run for 5 years so to 5 April 2017 but hopefully it will be extended.

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.

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Access our free webinar: SEIS / EIS: Navigating Traps for the Unwary

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