The aim of the Seed Enterprise Investment Scheme (SEIS) is to encourage investment in start-up companies by offering a range of tax reliefs to investors purchasing new shares in those companies. It is available for shares issued on or after 6 April 2012.
The scheme allows investors in qualifying companies to claim income tax and capital gains tax relief if the investment is approved under the SEIS rules by HM Revenue & Customs (HMRC).
Income tax relief (of 50% on investments of up to £100,000 per individual per tax year) and capital gains re-investment relief is available on investment. Exemption from capital gains tax and loss relief is available on a disposal of SEIS shares.
The SEIS can materially reduce an individual’s tax liability and makes investing in qualifying start-up companies significantly more attractive.
However, there are a number of conditions that must be satisfied in order for the investor to qualify for tax relief under the SEIS, both on the part of the investor himself and the company in which he is investing.
Legal Clarity’s SEIS Investment package is for companies wishing to issue shares to an investor that qualify for tax relief under the Seed Enterprise Investment Scheme (SEIS).
We usually work in conjunction with the company’s tax advisors to procure that the legal aspects of the investment tie in with the relevant tax advice, which is crucial to reaching the desired tax result (being qualification for SEIS Relief).
We draft SEIS Investment Agreements to meet your particular requirements.
There are a number of conditions that must be satisfied by the company and the investor for an investment to qualify for tax relief under the SEIS, including the following:
Commercial Reasons
The purchase of shares by the investor and the purpose for which the money is being raised by the company by way of the investment must be for genuine commercial reasons and not part of a scheme to avoid tax.
Duration of Shareholding
The investor must hold the SEIS shares for a minimum of three years from the date of issue.
Maximum Investment
The investor can only claim income tax relief on a maximum of £100,000 of SEIS qualifying investment per tax year.
The company can raise up to £150,000 by way of investment under an SEIS. It cannot have previously raised finance by way of an Enterprise Investment Scheme (EIS) or Venture Capital Trust (VCT). However, once the company has spent 70% of funds raised via SEIS, it is able to obtain further funding which qualifies under the EIS rules, provided it meets the relevant conditions.
Non-Material Interest in the Company
The investor must not have a material interest of 30% or more in the ordinary share capital of the company. However, there is an exception in place for founder shareholders who only hold subscriber shares where the company has not yet started to trade or begun preparations for any trade.
In addition, the investor cannot be an employee of the company but may be a director, should he wish to do so.
Qualifying Trade
The company should conduct business on a commercial basis with a view to making profits and this should not include a substantial level of excluded activities, such as investment activities or property development.
It must have been carrying on the qualifying trade for less than two years at the date of issue of the SEIS shares and cannot have been carrying on any other trade before it started to carrying on the qualifying trade.
The money raised via the SEIS investment must on the whole be used in the qualifying trade.
Independence
The investment must be in an independent company throughout the period of three years following the date of the issue of the SEIS shares. This means that it must not be controlled by another company or another company and any person connected to it.
In addition, any subsidiaries owned by the company must also be independent and not controlled by anyone other than the company.
Gross Assets
The company’s gross assets must be less than £200,000 immediately before the SEIS shares are issued.
This requirement, together with the two year rule (see Qualifying Trade above) excludes many companies from qualification.
Maximum Employees
The company must have fewer than 25 full-time employees at the time of issue of the SEIS shares.
Notify HMRC – SEIS 1
An application for formal approval needs to be submitted to HMRC in order for the company to be able to issue the SEIS certificates (SEIS 3)required by the investor to claim their tax relief. The application is done using a Form SEIS1, which cannot be submitted by the company until either the company has been trading for four months or, if not yet trading, the company has spent at least 70% of the monies raised by the relevant issue of SEIS shares.
Companies may submit details of the proposed SEIS investment to HMRC Small Company Enterprise Centre (SCEC) for advance assurance on whether the investor will be able to claim the relevant tax reliefs on the share purchase.
