Seed EIS

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.

Enhanced by Zemanta

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.

Enhanced by Zemanta

£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

Enhanced by Zemanta

Seed EIS (SEIS) match-making conundrum

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:

  • Lack of awareness – in fairness, this tax break has only been available since 6 April 2012
  • Confusion between SEIS and EIS – I have had a few instances where companies have already received funding under EIS so cannot then follow on with SEIS
  • Biggest reason – difficulty matching investors / business angels with qualifying promising investee companies.

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.

Enhanced by Zemanta

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.

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


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

Enhanced by Zemanta