Tax Small Business Advice

What is SEIS? – Alternative small business funding

9 Aug 2020

There is a wide variety of funding options available to small business in the UK. Traditionally, small business owners have gone down the route of bank loans, investors, personal savings and borrowing from family and friends.

On the other hand, technology has brought new options to the table - namely crowdfunding.

However, one option that’s often either overlooked or missed through obliviousness is the Seed Investment Scheme, or SEIS. The scheme, along with EIS, provides one of the best alternative routes of funding for the country's small businesses.

As a small business accountants in London, we specialise in working with clients to grow their business, and part of that includes helping them to secure the funding they need to prosper.

Get in touch with our team to discuss your business plan, and what you need to do to attract investment for your small business.

What is SEIS?

SEIS was launched by the government in April of 2012 with the intention of encouraging investors to finance startups by providing tax breaks in return for backing projects they may otherwise have viewed as being too risky.

The scheme creates a huge opportunity for entrepreneurs and small business owners as they can leverage the tax breaks associated with the scheme to attract the investment they want or need.

Investors can receive initial income tax relief of 50% on investments up to £100,000 per tax year in qualifying shares issued on or after April 6th, 2012.

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How does SEIS work?

SEIS offers investors a number of perks and incentives in return for investing in startups and small businesses.

Investors are offered income tax relief in proportion with the cost of the shares they purchase through SEIS, and should they make a loss upon the sale of their scheme shares, they have the opportunity to claim loss relief, which not only cuts their tax bill but also illustrates the reduced risk involved in SEIS.

SEIS is geared towards early-stage, new investment in companies with low levels of staff, assets and turnover, thus making the scheme integral to supporting the creation and growth of business in the UK.

As an example of SEIS tax relief, let’s assume an investor stakes £10,000 in a small business, pays income tax at the higher rate of 45% and is liable to pay capital gains tax at 28%.

Example 1: The company does well and doubles in value

Investment = £10,000

Income Tax Relief = £5,000 (investor gets 50% of investment back as a tax bill reduction)

Profit from sale = £10,000

Capital Gains Tax = £Zero (if the shares are held for three years)

Tax free return = £15,000

Example 2: After three years the company’s value is the same

Investment = £10,000

Profit from sale = £0

Your gain = £5,000 reduction on income tax bill

Example 3: The company folds and the shares hold no value

Investment = £10,000

Income Tax Relief = £5,000 (investor gets 50% of investment back as a tax bill reduction)

At risk capital = £5,000

Loss relief = £2,250 (45% of at risk capital)

Your actual loss = £2,750 (£10,000 – [£5,000 + £2,250])

Am I eligible for SEIS?

At the time of issuing shares, the company must not be listed on a recognised stock exchange and there must be no plan in place for it to become so listed.

Additionally, throughout the three year SEIS period, it must not be a subsidiary of, or be controlled by, another company. It must either exist to carry on a qualifying trade or else be the parent company of a trading group.

Furthermore, there must be no plan for the company to become a subsidiary of, or be controlled by, another company.

The qualifying business activity for which the money is raised by the issue of shares must be a trade conducted on a commercial basis and with a view to generate profit.

Although it is possible for qualifying activities to be carried on anywhere in the world, the company that issues the shares must have a taxable presence in the UK

For SEIS purposes, the value of the gross assets of the company and any subsidiaries must not exceed £200,000 immediately before the issue of shares.

Subject to certain exceptions, the maximum SEIS fundraising per Company is restricted to an all-time maximum of £150,000 and the maximum number of full-time employees (or full-time equivalent) in the Company at the time of investment is restricted to fewer than 25.

It is not possible for a company to qualify for SEIS relief if it has previously issued shares on which EIS Relief has been claimed, or has issued shares to, or received an investment from, a venture capital trust. If a company issues shares on which SEIS Relief is claimed, it is possible for it to issue subsequent shares on which EIS Relief may be claimed.