Financing start ups with SEIS
Financing start ups with SEIS
Raising finance for a start up company can be difficult at the best of times, but it can be easier if investors are protected should your company do less well than expected.
Seed Enterprise Investment Schemes (SEIS)
This is where the generous tax breaks offered under the seed enterprise investment scheme (SEIS) can come into play. If shares do not qualify for either the SEIS or the enterprise investment scheme, raising finance using one of the crowdfunding platforms may be virtually impossible.
The SEIS income tax reliefs alone mean that an additional rate taxpayer is risking just £2,750 of every £10,000 invested if the worst happens and your company’s shares become worthless. Investors will benefit by £5,000 if the shares do not grow in value, and if your company prospers the SEIS investment can be sold tax-free.
HM Revenue & Customs’s (HMRC’s) small companies enterprise centre (SCEC) will decide if your company and share issue qualify, and we recommend companies should get advance assurance of qualification. This will mean submitting details of your company’s plan to raise money, its corporate structure and its activities. Not surprisingly, the qualifying conditions for the company are quite stringent, including:
- If the company is already trading, the trade must have been carried on for less than two years.
- Various ‘safe’ trades, such as property development or running a hotel, nursing home or residential care home are not permitted.
- You must have fewer than 25 employees.
- Gross assets cannot exceed £200,000.
- The company has to be unquoted, although listing on the AIM or ISDX markets is permitted.
- There cannot have been any previous investment under the enterprise investment scheme or from a venture capital trust.
The total amount that your company can raise under the SEIS is limited to £150,000, and the shares issued must be full-risk ordinary shares which are fully paid up.
Your investors will not be able to claim any tax reliefs until you receive SCEC authorisation. However, you cannot apply for this until the company has either been trading for four months or at least 70% of the money raised by the share issue has been spent. Once authorised, the SCEC will issue the company with a certificate as well as tax relief claim forms for you to forward to your investors.
Tax relief claims
Your investors will not be able to claim tax reliefs until you receive SCEC authorisation. However, you cannot apply for this until the company has either been trading for four months or at least 70% of the money raised by the share issue has been spent. Once authorised, the SCEC will issue the company with a certificate as well as tax relief claim forms for you to forward to your investors.
Investors will normally claim tax reliefs on their self-assessment tax return for the year of investment, although they have the option of treating some or all of their investment as being made in the previous tax year. This might be done to obtain earlier tax relief, or because they cannot make full use of reliefs in the current year. Investors need to be aware that they will lose their tax relief if shares are sold within three years, although a disposal to a spouse or civil partner is permitted.
The importance of planning
If your company has already started trading, you need to start planning well in advance of the two-year deadline. It could take anything up to two months to obtain advance assurance from the SCEC, and you will then need to find investors – they may not be interested until you have SCEC assurance. Bear in mind that peak season for assurance applications is towards the end of the tax year, so expect delays from January to March.
Of course you might want to make use of the SEIS for your personal company financing, although you can only do so if your shareholding is no more than 30%. Shareholdings of close relatives are included for this test, so it’s unlikely that a family-owned company will qualify.
Contact one of our team today to discuss SEIS further:
020 7376 9333