When you start a business, one of the first challenges you will face is obtaining the funding you need to launch and grow. Many companies go down the path of investment, but it’s not always easy to find opportunities that allow you to secure finance.
The good news is that UK investment is on the rise, despite the coronavirus pandemic, with SMEs attracting record levels of equity last year. As such, there are more possibilities open for small and growing businesses than ever before.
In 2012, the HMRC set up the Seed Enterprise Investment Scheme (SEIS) to encourage investment in fledging ventures by offering tax relief to investors. The scheme still exists today, offering early-stage enterprises increased access to investment.
If you’ve never heard of SEIS before and are seeking seed investment for your business, we’ve explained how it works in more detail and whether it could help you in your financing goals.
- What is SEIS?
- What businesses can get SEIS funding?
- How to access SEIS tax relief
- How to apply as a business
- How does SEIS help businesses?
What is SEIS?
SEIS works by providing investors with various tax reliefs when they invest in qualifying businesses. By doing so, it aims to encourage investment in small, early-stage ventures so they can get the funding to achieve their goals.
If you’re an investor, the scheme allows you to claim relief on up to £100,000 invested through the scheme per year. If you claim at the top end of the allowance, you could receive reliefs covering over 78% of your investment.
These are the different tax reliefs investors can claim:
- Individual Income Tax relief of up to 50% of the amount invested
- Personal Capital Gains Tax relief on your initial investment, up to 50% of the investment and £50,000 total value
- Exemption from Capital Gains Tax on earnings from shares
- Profits realised within three years are also exempt from Capital Gains if they are reinvested in the SEIS
- Loss relief if the company, you’ve invested in, fails
If you’re a business, you can receive up to £150,000 of funding through the scheme. This includes any other state aid you may have received in the three years before the investment. It will also count towards any limits in later investments you may receive, including venture capital schemes.
You need to make sure you are eligible for SEIS funding and follow the scheme’s rules for at least three years after the date of investment. We’ve explained these in more detail below.
What businesses can get SEIS funding?
To benefit from the tax reliefs, investors must back a qualifying company. These are the criteria your business needs to meet so that someone can invest in you through the scheme.
- You carry out a new qualifying trade. This covers most businesses, but there may be exemptions for operations like coal production, nursing homes and property development.
- You are established in the UK.
- You’re not trading shares on the stock exchange at the time of seeking SEIS investment.
- You have no arrangements to become a quoted company or a subsidiary of one at the time of the share issue.
- You don’t control another company unless that company is a qualifying subsidiary, and another company has not controlled you since the date of your company being incorporated.
- You have less than 25 full-time employees.
- You’re not a member of a partnership.
- Your gross assets amount to less than £200,000 when the share is issued.
You also can’t access SEIS funding if you’ve already received funding through the Enterprise Investment Scheme or a venture capital trust.
HMRC has set up the advance assurance scheme, which aims to help businesses identify if their proposal is eligible for EIS, SEIS or other venture capital funding schemes. So, it may be worth using this to double-check you can receive SEIS or other government-backed funding.
How to access SEIS tax relief
SEIS companies can be invested in directly or through a specific SEIS fund. A SEIS fund is a managed investment vehicle that will raise equity from individuals to invest in eligible businesses. Many investment companies have established SEIS funds that your business may be able to benefit from.
If an investor has invested in you and wishes to claim SEIS tax relief, you will need to provide a SEIS3 form, which will confirm that amount invested, and that the investment is eligible for the relief. The SEIS3 is issued to you by the SCEC once it has been trading for four months or spent 70% of its total investment.
Once you pass it onto your investor, they should submit it as part of their annual tax return. They should keep hold of it after this point in case HMRC request to see it.
Tax relief can be claimed up to five years from 31st January of the year when the SEIS investment was made.
How to apply as a business
If you are pursuing SEIS investment as a business, you can apply through HMRC. HMRC will supply a SEIS1 form that you must fill in when you issue shares.
If you haven’t received advance assurance already, you will need to supply supporting documentation with your application.
You can find out more about how to apply, including what supporting documentation you need to provide and where to send your application here.
How does SEIS help businesses?
The main benefit of SEIS is that it offers investors incentives to support businesses. If you are eligible, this gives you a tool to attract investment and secure the funding you need. It can be difficult for companies seeking investment in their early stages, so this encouragement will be welcome.
By offering tax and loss relief, investors will see a venture as less risky, making them more comfortable investing. If your business has previously been deemed ‘high risk’ and you have struggled to secure investment in other routes, this could help to mitigate the dangers and make investors more receptive towards you.
The SEIS can offer you a maximum of £150,000, which could be a valuable boost towards your financial goals.
If you seek further investment, or your business is more established, it is worth considering the Enterprise Investment Fund (EIS). It works similarly to the SEIS but is aimed at companies that are past the early-stage set-up and may have more staff and assets. Through the EIS, you can also raise up to £5 million per year (with a lifetime cap of £12 million), £10 million per annum if invested in Knowledge Intensive Companies (KICs) and a lifetime cap of £20 million). Many businesses may move onto the EIS after receiving SEIS investment, helping your business receive ongoing investment as you grow.
Conclusion
Securing finance through investment is key to launching your business, beginning to generate revenue and move towards your growth goals. The SEIS can help early-stage ventures achieve that while giving investors more reason to support UK SMEs in exchange for reduced taxes and risk mitigation.
With it, both parties benefit, and eligible businesses can overcome some of the barriers to finance that might plight them otherwise.
If you are seeking SEIS investment, Pegasus Funding can help. We can work with you to find and secure the right funding for your business.
If you aren’t eligible for SEIS funding, we can also discuss alternative solutions for your enterprise, including the EIS and venture capital.